Property taxes need reform, but changes must be fair to Londoners

Britain’s domestic property taxes are in a terrible state. Council Tax bands are still based on house valuations made in 1991, and the 30 years since then have seen huge variations in house price growth between different places and properties. Stamp Duty is a tax raised on people when they move house, which has the effect of gluing up the property market and of encouraging people to stay for longer in homes that are too big or too small for them. What can be done to change this unsatisfactory situation? And what might the implications be for London of any major reforms that might be tried?

One idea that has been gaining currency in the run-up to the budget is flat rate property taxes, with home-owners paying a set proportion of their property’s value each year. Research by WPI Economics suggests that a tax of 0.48% of values could generate enough revenue to replace both Stamp Duty and Council Tax. And the Fairer Share campaign suggests that such a tax would leave 76% of UK households better off.

Property value taxes have a lot to recommend them (as do more ambitious proposals, such as land value taxes, and more modest reforms, such as new Council Tax bands). They are a lot more progressive than other taxes: Council Tax for the most expensive properties is only three times the rate it is for the cheapest properties, whereas property prices can vary by a factor of more than 100.

There would be issues with implementation: for example, transitional measures would be needed to avoid “cash-poor” owners of larger houses being hit by such a dramatic hike in taxes that they might be forced to sell in a hurry. But there’s a bigger problem for London. Levying property value taxes nationally at a flat rate would represent a massive shift of the tax burden onto London from the rest of the UK. The Fairer Share website suggests that communities outside London would pay £6.5 billion less in property taxes. As their proposal is intended to be fiscally neutral overall, that means London would pay £6.5 billion more.

Such a shift may have populist appeal at a time of “levelling up” (though maybe not for the many Conservative MPs in London and the south east whose constituents would suffer), but it ignores the fact that Londoners are as much victims as beneficiaries of high house prices. Incomes in London are higher than in the rest of the country, but they are much closer to the average once housing costs are taken into account. And low-paid Londoners, who earn little more than counterparts elsewhere, are already particularly squeezed: London has the highest rates of child poverty in England.

Adding £100 a month to Londoners’ tax bills (in line with the “capped” Fairer Share proposals) would drag incomes in the capital below the national average, even before other costs of living were taken into account. On top of that, Londoners will be struggling in the wake of a pandemic that has hit the capital hardest: in December 2020 London had seen the steepest rise in benefit claims of all the UK’s nations and regions, and had the second highest rate of claimants (after the West Midlands).

There is still a case for tax reform, and the budget would be a good opportunity to announce a careful review. But, as the London Finance Commission (set up by Boris Johnson and reconvened by Sadiq Khan) argued, this should take place on a regional basis, not through nationalising local taxes. The overall fiscal flows between different parts of the country could be preserved (perhaps with a review every few years to take account of how different regions have prospered), while different regions could set property taxes that reflected the specifics of their housing market – with different Council Tax tiers, flat rate taxes, or exemptions and discounts applied to reflect local economic circumstances.

And this is not to argue against London paying a fair share to the rest of the UK. London’s taxpayers made a net contribution (taxes minus public spending) of nearly £40 billion in 2019. And that’s fair: London has more productive businesses, high-spending tourists and rich residents – or at least it did in pre-pandemic times. But squeezing the capital further, as the UK struggles to recover, would look extractive, blinkered and self-defeating rather than fair. 

[First published in OnLondon, 28 February 2021]

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