Property tax – Richard Brown

Mansions on the bill?

As regular readers know, On London is always on guard against attempts to divert more funding from London, already a major net contributor to UK taxes, to the rest of the country. Other regions need investment for sure, but London’s golden eggs are in limited supply. The capital’s problems, which include the highest regional poverty rates after housing costs, cannot be ignored.

But it’s hard to deny that Rachel Reeves had a point when she observed in her budget speech that a “Band D home in Darlington or Blackpool pays just under £2,400 in Council Tax…nearly £300 more than a £10 million mansion in Mayfair”.

You can decry the pointing at Mayfair when several London boroughs charge more in Counci Tax than Darlington or Blackpool. You can point out the historic reasons for the imbalance, from the tax’s origins as a post-Poll Tax hybrid of service charge and tax, to outdated valuations and variable price changes since 1991, to the relative performances of councils in different parts of the country. You can highlight the way that other local taxes, such as Business Rates, are raised in London and distributed across the country. But even so, the disparity doesn’t look fair.

The Chancellor’s solution is a new “mansion tax” – or “high value council tax surcharge” to use its full and slightly misleading title – which will be imposed on properties valued at over £2 million. It will be introduced from April 2028 – like other tax rises, kicked towards what Reeves must hope will be sunnier uplands two years hence. Treasury calculations estimate the tax will raise £400 million by 2029/30.

The “mansion tax” will clearly hit London (and the South East) harder than other English regions, but it is hard to work out precisely how much harder. The most recent comprehensive valuation of properties, which forms the basis of Council Tax bands today, was made 35 years ago. Property price changes have diverged wildly since then, so it doesn’t tell us much about current values.

One possible proxy would be looking at prices actually paid for properties. Such data is collected and published by the Land Registry. This is probably as good as anything else in the public domain, but still pretty flawed. For one thing, we cannot assume that the values of properties sold in any given year reflect the values of those that are not. There may be more high value properties than show up in the sales figures, as these have proved toughest to sell in recent years. Or, there may be fewer, as prices have dropped for this very reason (particularly in “prime” London).

Still…In 2024, around 2,600 properties in London were registered as sold for over £2 million, representing around two thirds of all sold at that level in England. Almost half of these sales were in Kensington & Chelsea, Camden, Westminster and the City of London. Properties in London were also far more likely to be sold for the highest prices: 0.5 per cent of all sales in London were for more than £5 million compared to 0.01 per cent of all such sales in the rest of England.

Extrapolating those ratios to estimate (very roughly) the impact of the measures, it looks like around 100,000 of London’s three million non-socially rented dwellings (3.3 per cent) might be liable to the tax, compared to around 40,000 of the 19 million in the rest of England (0.2 per cent). In total, Londoners could pay just over 75 per cent of an indicative mansion tax yield of £525 million.

This is a higher total figure than that estimated by the Treasury, which has no doubt modelled non-payment, price changes and various valuation finagles, but it is not that far off. My workings can be seen below.

So, Londoners will be paying the bulk of this new tax, and that will include many who feel very far from “wealthy”. But it won’t go to London. Though it is called a “council tax surcharge”, the tax has nothing to do with Council Tax: funds raised will go straight into national coffers, bypassing even a nominal allocation to local authorities (who would likely lose any gain in adjusted government grant allocations). In the words of the LSE’s Professor Tony Travers, “It’s a central government tax. Pure and simple”.

London’s net fiscal transfer will creep up from the £43 billion that went from the capital to other parts of the UK in 2022/23, and accountability will become ever more confused. The Local Government Association has already highlighted the risk that councils are regarded as accountable for a charge that they do not control or spend, and have asked that the funding raised is allocated to local authority services.

There may be significant practical difficulties in implementation too. There have been revaluations since 1991: the Valuation Office undertook one of Wales’ 1.5 million homes in 2003, and is planning another by 2028, using sales data and automated valuation to develop a more sophisticated approach to determining values.

But it’s not going to be easy. As a signal of complexity, it is worth noting that the Welsh revaluation has been postponed from this year. Furthermore, people living in houses valued at over £2 million include many who have tax advisors, chartered surveyors and lawyers on speed dial.

Experts such as Paul Johnson, Dan Neidle and Neal Hudson have also observed that the system is a throwback to the “slab” system of Stamp Duty Land Tax that was phased out in 2016, and led to sale values clustering just below the points where higher rates would kick in. April 2028 suddenly seems a lot closer.

More fundamentally, this is a clunky half measure. There is a strong case for a comprehensive reform, to fully revalue and re-band properties for Council Tax, or to go further and replace Council Tax and Stamp Duty with new property or land value taxes, using innovative valuation techniques to create a more transparent, responsive and proportionate system.

The mansion tax is not that comprehensive reform. Instead, the risk is that this measure, like Inheritance Tax hikes on owners of farmland and family businesses, annoys an influential and vocal minority, without raising huge sums.

And it will leave the core machinery of Council Tax, with its 20th Century valuations, its restrictive banding model, and its proliferating surcharges and discounts, looking increasingly dusty and dilapidated – like an unloved and barely functional household appliance that everybody hates but nobody can quite bring themselves to replace.

First published by On London

Buy with a little help

Should wider home ownership be a public policy objective? It is one of the big fault lines in housing policy debates. Advocates argue that ownership represents better value than renting, offers people a way to build up capital and creates more stable neighbourhoods. Sceptics say that our obsession with property ownership is diverting investment from more socially useful channels and fuelling a monstrous bubble of unaffordable house prices.

Both arguments are true to an extent. Home ownership has built up capital for generations and supported social mobility, but as prices have shot up more and more people have been locked out. Home ownership rose through the 20th Century, from fewer than 25 per cent of households in 1918 to nearly 70 per cent in 2001, though it has fallen back since then and particularly since the financial crisis of 2008/09.

In London, ownership fell sharply for 25-34 year olds in the first years of this century. Fifty per cent of that age group were owner-occupiers in 2001, but only 27 per cent were in 2016. The proportion has risen slightly since then (as a result of stalled prices and extended availability of Help to Buy loans), but remains low by historic standards.

It’s not hard to see why: mortgages may be relatively affordable, but the 2019/20 English Housing Survey, published this week, found that the median deposit for London’s first time buyers was £70,000 – more than twice the median salary. Given that less than half of those renting privately have any savings at all, it is mainly those with family wealth (“the Bank of Mum and Dad”) who can buy a property.

Some buyers have been assisted by the Help-to-Buy Equity Loan scheme (H2B), which was launched in 2013. It allows buyers to borrow a proportion of their deposit from the state and repay it when they sell-up or remortgage. Take up was initially low in London, but has increased since the maximum loan available was raised in 2016.

The scheme has been controversial. By stoking demand while doing to nothing to boost housing supply, it has been accused of pushing up prices. Restricting the scheme to new-builds has fuelled overpriced, poor quality schemes aimed primarily at the H2B market. These is also a risk that both government and house-buyers are left with losses in a period of stagnating prices. And now, the government has started winding the scheme down, restricting it to first-time buyers, and planning to shut it down completely by 2023. They have not said what, if anything, will replace it.

What is to be done? Many would advocate a huge increase in social housing provision and an end to the obsession with the “property ladder”. We certainly need more social housing. But as someone who bought a home when they were relatively cheap, I am uneasy with “Generation X-plaining” to younger people that they should be happy renting and miss out on the security and opportunities that can come with home ownership. And London’s recovery from coronavirus will not be helped if people who want to buy have to move out of the city (or choose wealthier parents).

Of course, we don’t know what will happen to UK house prices as we recover from the Covid crisis. As the Stamp Duty holiday ends and the recession bites, the market may slow or even go into reverse. London already has the lowest rate of house price growth in England. Market moderation is welcome, but London would need a precipitous and damaging crash in prices (which would freeze the supply of new homes for sale) to bring them in line with wages and savings. Even the government’s favoured solution – discounted “first homes” – would require deposits beyond the means of many Londoners.

There is a powerful moral case for supporting first-time buyers, particularly those without family wealth, and the core of the H2B approach – a state-sponsored loan that is repaid as and when property prices rise – seems sound. But the scheme needs fixing. Firstly, it should not be restricted to new build, thereby tying young people into an expensive and mixed-quality market. Its primary purpose should be levelling the playing field, not “stimulating the market”. And the scheme should be able to run for longer than five years, particularly given the choppy conditions of the property market right now.

Would this simply fuel the speculative fires of the UK housing market? Maybe. But punishing young people from poorer backgrounds for the exuberance of property speculation seems absurd and unfair. So we should accompany support for first time buyers, with reform of the tax breaks that make home ownership so attractive as an investment – for example, the UK’s outdated and regressive property taxes, and even the exemption of family homes from capital gains and inheritance taxes. There is no reason, beyond electoral calculation, that homes and homes alone should allow untaxed capital accumulation.

Restricting house-buying to wealthy families is a problem. Runaway house price inflation has also been a problem. Both problems have been most acute in London in recent years, and they need to be tackled together if the city is to offer opportunity to present and future citizens alike as it recovers from the pandemic.

First published by OnLondon.

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]