The Fairer Share Team

Written evidence: Tax after Coronavirus

In September 2020, Fairer Share submitted written evidence to the Treasury Select Committee’s important inquiry “Tax after Coronavirus”. This article details the submission and our recommendations to reform the UK’s unfair property tax system.

Introduction 

• The Government’s efforts to help families and businesses across the UK in the wake of the pandemic have been commendable. Millions of households with concerns over their incomes have been supported through this period via the furlough scheme. However, it is clear that these measures cannot be in place for ever, especially as the Chancellor and the Treasury look at ways in which the public finances can be put back on to a sustainable footing in the medium term.
• As the furlough scheme and other support programmes come to an end, the Government will have to look at new ways of providing support to those affected by coronavirus while meeting its overall economic and fiscal objectives. Balancing these two issues is likely to necessitate changes to the tax system. Therefore, it is welcome that the Treasury Select Committee is using this period to reflect on some of the long-term issues (and potential opportunities) caused by the pandemic.
• Tax changes should focus on more than raising revenue. Policy makers should take a macro look at the tax system itself to ensure that it is not entrenching existing social and economic inequalities, and instead see it as a lever to support broader public policy objectives. A key part of this must be considering how tax can be used to create a fairer, more sustainable Britain, where wealth is distributed more equitably across the regions and nations. Indeed, this is at the heart of the Prime Minister’s levelling up agenda.
• In this submission we look at two areas of the tax system which are in desperate need of reform – Council Tax and Stamp Duty. In the wake of coronavirus, we propose that policy makers grasp the opportunity to remove regressive, outdated property taxes and replace them with a proportional flat rate tax on the value of the property (what we have called a Proportional Property Tax or PPT). A PPT would function as a form of wealth tax, with those who have greater property wealth paying more than those in poorer households. However, as PPT is based purely on property values, it represents a more deliverable option than other types of wealth tax that have been mooted which are based on a much broader definition of wealth.
• The introduction of PPT would have a broad array of economic and social benefits that we set out in more detail below. At its heart, replacing Council Tax and Stamp Duty with a PPT would be about creating a fundamentally fairer system; one that re-establishes the link between taxation and property price, providing a financial boost to 75% of UK households.

Key recommendations

i. Replace the Council Tax band system with a Proportional Property Tax (PPT) at a flat rate of 0.48% of property value

ii. To ensure a continuing link between local taxation and expenditure we suggest the headline PPT rate be split between a fixed national rate (going towards redistributive grants) and a floating local rate (that would be entirely spent locally and could be reduced or increased). Our initial proposal would be to have a 0.32% national rate and 0.16% local rate.

iii. There would be a higher rate of 0.96% of second, empty and non-resident owned homes

iv. Abolish Stamp Duty Land Tax (SDLT) on owner-occupied property

v. Property tax should be collected from owners, rather than tenants

vi. A deferral mechanism should be introduced for those owners unable to pay, with a modest interest charge included on the PPT – similar to the existing Deferred Payment Agreement scheme already in place to help people manage their social care costs

vii. Abolish majority of property tax reliefs and exemptions to make the system simpler

viii. Use recent improvements in technology to revalue all residential property, with annual revaluations thereafter

ix. Apply the property tax to undeveloped plots of land that have received planning permission from the local council

Key benefits

i. Put fairness back into the tax system by ensuring everyone pays the same % of tax on the value of their property. This would end the current situation where the effective tax rate on residential property is just 0.2% in London compared to 0.7% in the North East, over three times as much.

ii. Support “levelling up” and regional rebalancing by reducing bills for those outside London and the South East. A move to PPT would save Council Tax payers outside of London £6.5 billion per year, representing a huge boost to countless communities and their local economies. It would also provide further incentives for people to move out of London to benefit from lower rates as Covid has shifted the economy towards more home working.

iii. Simplify the tax system and cut the administrative burden for local authorities. 8.7 million households would be removed from property tax altogether, as the obligation to pay is transferred to the landlord. This would save tenants time and local councils £400 million in annual administrative costs.

iv. Increase the supply of housing by changing the incentives around building for residents and developers alike. In addition, PPT would make 1.4 million second homes, empty homes and undeveloped properties finally pay their fair share of tax, therefore incentivising their owners to rent, sell or develop their properties.

v. Our system is fully costed (see appendix) and revenue neutral, raising just as much from UK taxpayers as Council Tax and Stamp Duty currently do. Furthermore, PPT makes it simple for policy makers to understand how reducing or increasing the rate changes funding available centrally that is available for redistribution.

Issues with the current domestic property tax system

While property taxes are viewed as effective by economists as they are difficult to avoid, the current property tax system is failing against its policy objectives. Council Tax and Stamp Duty are entrenching regional and social inequalities and limiting overall housing supply in the market.

Council Tax

There is agreement across the political spectrum that Council Tax is a poorly-designed and highly regressive tax. Based on property values from almost thirty years ago, the IFS has said that it is “increasingly out of date and arbitrary.”[1]

It is also one of the most unpopular taxes with the general public. Polling conducted by Fairer Share in January 2020 found that just 29% of the public believe it is calculated fairly, only 26% believe their own bill is set at the right level, and only 33% are in favour of keeping the status quo.

The current Council Tax system benefits wealthy homeowners, many of whom own multiple properties, but penalises younger adults and low earners who end up paying higher effective tax rates than those in more valuable properties. There are a number of reasons for this:

Council Tax is based on property valuations that are almost thirty years out of date. It has not kept up with the huge growth in house prices, especially at the top-end of the market. It also contributes to the inequality between different regions in England. For example, the effective tax rate on residential property is just 0.2% in London compared to 0.7% in the North East.[2]

Due to the structure of the bands itself, homes at the bottom of a band pay proportionately more than those at the top of each band. There are also small differences between different bands, despite significant gaps in the value of properties.

It has well-intentioned, but distorted, exemptions for second homes and single occupants, which encourage under-occupancy and stop those who need homes most from benefitting.

Stamp Duty Land Tax (SDLT)

Unlike Council Tax, SDLT is a progressive, rather than regressive, tax. However, it has contributed to the current housing crisis by discouraging homeowners from moving. As the Centre for Policy Studies (CPS) notes, it is regarded as the “least fair tax in the country with the exemption of inheritance tax” and it is “overly complicated.”[3]

The knock-on effect from SDLT and its increasing rates is an inefficient use of existing property, as households are dissuaded from upsizing or downsizing. This has a real-world impact; it stops older people moving out of larger family homes they no longer need and inhibits a growing family from upsizing, all of which would lead to a more effective use of housing.

Combined with Council Tax, SDLT makes the current housing stock more affordable for investors and purchasers of second homes, who can pay the cost, compared to those around the country on lower salaries whose property is their primary home. It also excludes developers, incentivising them to land bank, increasing the strain and exclusivity of the market.

The government clearly understands that SDLT is a ‘bad’ tax, as seen by recent temporary increases to the starting threshold in response to the pandemic. However, this is only a stop gap measure and is due to end in March 2021. CPS’s research estimates that abolishing SDLT “would mean 25% more housing transactions,” demonstrating the cooling effect SDLT has on the market and the need for HMT to find a better long-term solution.[4]

Our solution: The Proportional Property Tax

A new property tax is needed which charges households based on their actual property wealth and ability to pay, encourages the efficient use of existing property, and is simple to understand. We propose introducing a Proportional Property Tax (PPT), which replaces the Council Tax band system, SDLT on owner-occupied property, and incentives and exemptions such as the Bedroom Tax and those for single occupants, second and empty homes. Our manifesto sets out our proposal in more detail, but we have summarised the main points below.

How it would work?

• The PPT would be set at a flat rate of 0.48% for owner-occupied property, no matter the value of the property or its location. This is the rate required to raise the same amount in revenue as the current system.
• In order to maintain the link between local expenditure and local taxation, we suggest that the rate will consist of two components. A fixed national rate which would go to central government for redistribution and a floating local ratewhich will go straight to the local authority to be spent locally. An indicative split could be 0.32% for the national rate and 0.16% for the local rate.
• The flexible rate allows councils two broad approaches; operate efficiently to reduce their costs and pass the saving on to residents or increase the local rate and invest that in the community. Lower rates get capitalised into higher property values increasing revenue and providing opportunity for further reductions. An alternate approach harnesses the link between many forms of investment (good schools and infrastructure) and rising property prices which would allow the rate to be reduced as property prices rise and see local communities benefit from much needed investment. Crucially it would be the local community’s choice on which option to adopt.
• PPT should be collected not from tenants, but directly from owners, who are in a better position to pay. This would bring England into line with international practice.
• For second, empty and non-resident owned homes, including homes of overseas owners, there should be a higher rate of 0.96%. For primary residences SDLT will be abolished but will remain in place for second homes and non-resident buyers. These receipts make a significant contribution to funding for redistribution. This property tax would also be applied to undeveloped plots of land that have received housing permission, encouraging developers to start building and increasing the supply of homes.
• A deferral system should also be introduced for those owners who can prove they are generally unable to pay; this would see the tax and a modest interest charge paid at a later date or when the home is sold. Such a system is already in place for social care, with local councils offering Deferred Payment Agreements for the cost of care, and so should be feasible to expand. This would help avoid debt issues such as bailiffs or complaints from households that they are unable to pay (an issue which is likely to increase as a result of Covid).
• For the introduction of the PPT, there will have to be a revaluation of all residential property. This should still be led by the Valuation Office Agency (VAO), though valuations should be derived from actual sales data and recent changes to house values in local areas. The Government has stated its ambition to be guided by data and technology to improve efficiency and cut costs – building an algorithm similar to those used by Zoopla and Rightmove to calculate data and provide accurate values for each home would help achieve this. Under such a system going forward, the VAO would be able to revalue properties using its algorithm each year, with properties being taxed on their average value across the last three years.
• Our system is fully costed (see appendix) and revenue neutral, raising just as much from UK taxpayers as Council Tax and Stamp Duty currently do. While many have convincingly argued for increased council budgets to pay for essential public service needs, we believe calling for an increase in taxes is beyond the scope of this paper.

What are the benefits?

Putting fairness back into the tax system

• As set out above, the flaws in the current system mean that Council Tax is only weakly linked to property values. A person living in a property worth £100,000 pays around five times more tax, as a share of property value, than someone living in a property worth £1 million.
• Not only is this fundamentally unfair, it is having a significant negative impact on the least well off in our society. This is especially the case as younger adults and lower earners are concentrated in lower Council Tax bands, and therefore pay higher effective tax rates than wealthier and older households.
• The effect of the current system is that those on lowest incomes are being presented with bills that are simply unaffordable and disproportionate to their earnings. As of March 2019 the total amount of outstanding Council Tax debt in England was £3.2 billion, an increase of over 20% in just four years. This situation will only get worse as households struggle to manage falling income as a result of Covid and local councils look to restore their finances through ever increasing Council Tax bills.
• Charging a flat rate would remove this unfairness from the system, ensuring we are taxing people fairly based on the value of their property. Overall, moving to PPT would see 18 million households paying less tax, with 75% of households better off. Additionally, PPT includes a deferral mechanism, allowing outstanding bills to be paid when the household can afford it or at the sale of the property, giving people necessary breathing space during this difficult period.

Supporting “levelling up” and regional rebalancing

• As we have seen, Council Tax under-taxes larger and more expensive properties – concentrated in London and the South East – while overtaxing cheaper homes in other parts of the country. This effect has been magnified because, since the inception of Council Tax, properties have not been revalued to keep up with property price increases – which again have been largest in London and the South East.
• The current system has led to the deeply unfair situation in which those parts of the country with greater property wealth pay relatively less in Council Tax. The effective tax rate on residential property is just 0.2% in London compared to 0.7% in the North East, over three times as much. This is manifestly regressive, penalising those who live in the regions and serving to entrench existing regional wealth inequalities.
• A move to PPT would save Council Tax payers outside of London £6.5 billion per year, representing a direct fiscal transfer to those outside of London and the South East. While this change is fair in its own terms and would help the Prime Minister to deliver his levelling up agenda, it would also be a targeted relief to help those communities most struggling to recover from the economic impacts of Covid-19.
• Reducing property taxes in the regions would also provide greater incentives for people to move out of London to benefit from lower rates. While lower rates are probably not a key driver in themselves, it would capitalise on the effect of Covid which has seen a fundamental shift in the economy towards greater home working. More people moving to the regions would benefit those communities both in the short-term from relocated workers generating greater footfall on local high streets and the longer-term through raising the quality of jobs available in these areas.

Simplifying the tax system and cutting the administrative burden for local authorities

• The current system is an administrative burden on both people and councils. In moving to PPT 8.7 million households would be removed from property tax altogether, as the obligation to pay is transferred to the landlord. Making the landlord responsible for the tax would reduce the number of rate payers (due to multiple ownership).
• In addition, every year over 750,000 English house buyers have to pay Stamp Duty or fill out forms to declare exemptions. Ending SDLT would make house buying simpler and cheaper, speeding up the overall house buying process, and helping to stimulate the housing market as it emerges from the Covid induced deep freeze.
• Taken together, these reforms would save tenants time and local councils £400 million in annual administrative costs – a vital lifeline when council budgets are already stretched beyond capacity following Covid.

Increasing the supply of housing

• Recent government data shows that over 216,000 homes have been empty for over six months, while 7.7 million homes claimed the single occupant discount in 2018.[5] One recent study by academics at UCL estimated that housing worth a total of £123 billion in Britain is rarely used.[6] Exemptions in the Council Tax system have reinforced this trend; by under-taxing larger and more expensive properties relative to other homes.
• In taxing housing transactions Stamp Duty discourages the efficient use of our existing stock of housing. This is further exacerbated because Council Tax does not apply to undeveloped sites that have already received planning permission from their local authority thereby incentivising developers to delay construction in the expectation of rising land prices, a phenomenon known as “land banking.”
• By making 1.4 million second homes, empty homes and undeveloped properties finally pay their fair share of tax, this would incentivise their owners to rent, sell or develop their properties – contributing to an increase in the overall housing supply in England.
• PPT would also change the incentives for both residents and developers to support new house building. For example, if government linked the budget for a local area to a local homes target, residents would clearly see the link between supporting development and spreading the tax burden between more property owners. Equally PPT is likely to increase demand in areas of the country where incomes are lower, by significantly reducing the cost of property tax relative to the price of property. Therefore the proposal should be seen as complimentary to the Government’s recently published planning paper, “Planning for the Future.”

What are the challenges?

• How would you value the land?

It is perfectly possible to value land separately from property for the purposes of taxing only the former. The ONS already produces estimates of land value in the UK, though these are not detailed enough for modelling the introduction of a CLL.[7] Further evidence that land valuation is perfectly feasible comes from international experience. This includes Estonia, Australia and Denmark, as well as Jamaica, Kenya, New Zealand, South Africa, and certain parts of the United States.

• Why not simply reform Council Tax bands?

By its nature, Council Tax is highly regressive in terms of property value and reforming the bands would likely have limited impact on the current situation. The IFS have argued that “revaluation alone would have little effect on the average tax bills of different household types.”[8] While HM Treasury could consider additional Council Tax bands at the top end to tax wealthier households, this would not produce a fairer system in the long run as the majority of households will still be paying Council Tax based on an outdated valuation.

• Doesn’t this mean councils outside of London and the South East will actually lose money?

No. The PPT will not decrease tax revenues for local authorities. The ‘national rate’ portion of the tax will be collected by central government and distributed to local councils accordingly to ensure their overall revenue remains the same. Given the scale of loss in local government funding as a result of Covid-19, the government is likely to have to introduce greater central funding top-ups to local government than was previously the case anyway.[9]

• How is this different to the poll tax?

The poll tax was a fixed charge on each individual, regardless of their wealth, and therefore highly regressive. PPT represents a much fairer, and administratively easy system that makes property taxes progressive.

• Is it fair that parts of London and the South East will end up paying more tax?

Properties in London and the South East have seen the greatest increase in value since Council Tax was introduced. This means that for almost three decades they have benefitted from lower Council Tax bills, enabling these households to spend more on mortgages. People buying in London and the South East will also benefit the most from the removal of SDLT, given this is already linked to property prices.

Conclusion

The coronavirus pandemic has starkly highlighted the existing inequalities that currently exist within the UK. Rightly, as we begin to recover from the crisis, policy makers are looking at how we can do so in a way which tackles the social and economic issues facing the country. The Government’s ambition to increase fairness and level up the regions is the right one. Targeted investment in skills and infrastructure is part of the way out of this crisis, but the answer also lies much closer to home for many families and individuals – the tax system.

Replacing outdated and unfair property taxes with PPT would boost the incomes of millions of people across the UK. With international inspiration of similar proposals to PPT that have been implemented successfully, and significant advancements in technology over recent years, we believe that now is the right time both politically and economically to fundamentally change the way in which the UK’s property tax system works and ensure it helps create a fairer andmore equal society.

by The Fairer Share Team

Open Letter to the Chancellor of the Exchequer | Reforming our Residential Property Taxes

Below is the Open Letter sent to the Chancellor of the Exchequer, signed by parliamentarians, think tanks, charities, tax reformers and academics. An abbreviated version was published in The Sunday Times on 06/09/20.

We live in a society that has come to be seen by many as unequal, creating a “geography of discontent”. 

The top 10% of UK households possess 45% of all wealth, while the bottom half own just 8%.  Furthermore, research shows that nearly three quarters of the British public agree that “rich people get an unfair advantage”, while just 30% feel that “British society as a whole is fair”.

We now face the challenge of addressing the Covid-19 pandemic. In many ways, the pandemic has brought out the best in our nation as social bonds were strengthened to face this unprecedented crisis. Regrettably, the pandemic has also highlighted deeply entrenched social and economic divisions. It has inflicted a particularly heavy economic toll on those in low-paid and insecure work, young renters, and ethnic minorities. It is the less well-off who have paid the heaviest price. 

As we emerge from the immediate crisis of the pandemic, we have an opportunity to rebuild a fairer economic settlement across the country and between the generations. A chance to create a more just society and crucially, a system people believe is right. One that leaves our public services more resilient to face future challenges. A society where hard work brings both rewards and obligations accepted as reasonable by everyone.  

As the process commences, we believe reforming Britain’s property taxes are an urgent and important part of the solution. 

Council Tax is poorly designed, out of date, and unpopular. It is based, in England and Scotland, on property valuations that are almost 30 years old and therefore bear no resemblance to the realities of current pricing levels. Its structure ensures that all those in the same band pay the same amount of tax irrespective of the actual value of a property. A person living in a property worth £100,000 pays around six times more tax, as a share of property value, than someone living in a property worth £1 million. This places the heaviest burden on the young, low-earners, and those living in less prosperous parts of the country, who typically live in modest properties. 

Council Tax is increasingly putting lower-income families into debt. As of March 2019, the total amount of outstanding Council Tax debt in England was £3.2 billion, an increase of over 20% in just four years. The effect of Covid-19 has only exacerbated the situation, with an extra £700 million added in outstanding Council Tax debt from over 800,000 UK households since March. 

Council Tax’s partner in crime is Stamp Duty. Stamp Duty is a better designed tax than Council Tax in the sense it is progressive, linked to property values and is more generous to young people thanks to its first-time buyer discount. We welcome the Chancellor’s Stamp Duty holiday but it does not go far enough. By taxing property transactions, Stamp Duty discourages homeowners from moving that would lead to a more effective use of housing. This has wider economic consequences when it leads to people turning down job opportunities outside of their local area due to the cost of moving home.

Council Tax and Stamp Duty have also played their part by fuelling house price inflation and encouraging the inefficient use of property and land. By failing to keep up with rapid house price growth over the past three decades, Council Tax has deprived the Government of crucial tax revenues and artificially increased the relative attractiveness of housing as an investment, inflating the housing bubble.

The result is that owner-occupiers are increasingly being crowded out by investors and purchasers of second homes, who now make up roughly a quarter of all residential property sales. The regressive nature of Council Tax combined with Stamp Duty’s tax on transactions combine to discourage the efficient use of our existing stock of housing.

Solving the housing crisis will require a multi-pronged approach, including more building and modernised planning rules as well as tax reform. In contrast to the current system any reform should have principles of fairness and equality at its core. A new economic settlement, including a fair system of property taxation, is urgently needed to restore social cohesion.

What makes a tax fair is its ability to raise sufficient revenues to pay for the public services we all value and depend upon, while distributing that burden based on people’s ability to pay. Economists see property taxes as useful because they are hard to avoid, as well as being less economically damaging than taxes on people’s incomes or businesses.

A new property tax should therefore: charge people based on their actual property value and ability to pay, encourage the efficient use of existing property, and be simple to understand.

The Government has set its mind on narrowing the divide, promising to “level up” Britain’s regions. Reforming Council Tax and Stamp Duty with a fairer system would be a good start on achieving this vision.

We welcome the Treasury Committee’s new inquiry into “Tax after Coronavirus” and urge the Government and HM Treasury to take this opportunity to conduct a thorough review of Britain’s residential property taxes. 

Signatories

Tom Burgess, Chair, Coalition for Economic Justice

Sir Vince Cable, former leader of the Liberal Democrats

Wendy Carlin CBE, Professor of Economics, UCL

Andrew Dixon, Founder, Fairer Share

Liz Emerson, Co-founder, Intergenerational Foundation

Kevin Hollinrake, Conservative MP for Thirsk & Malton

Gavin Kerr, author of “The Property-Owning Democracy: Freedom & Capitalism in the 21st Century”

Matthew Lesh, Head of Research, Adam Smith Institute

Polly Mackenzie, Chief Executive, Demos

Robin McAlpine, Director, Common Weal

Professor John Muellbauer, Institute for New Economic Thinking, Oxford Martin School

John Myers, Co-founder, YIMBY Alliance

Robert Palmer, Executive Director, Tax Justice

Andrew Purves, author of "No Debt, High Growth, Low Tax"

Ben Rich, CEO, Radix

Carys Roberts, Executive Director, IPPR

Will Tanner, Director, Onward

John Tizard, Head of Strategy, Taxpayers Against Poverty

George Turner, Director, Tax Watch

Torrin Wilkins, Director, Centre Think Tank

Dan Wilson Craw, Director, Generation Rent

Dr Wanda Wyporska, Executive Director, The Equality Trust

Reuben Young, Director, Priced Out UK

by The Fairer Share Team

Kevin Hollinrake MP - Letter to the Prime Minister

This letter, written by Kevin Hollinrake MP for Thirsk & Malton, was sent to Prime Minister Boris Johnson on August 25th.

Dear Prime Minister, 

Some like-minded colleagues and I would be very grateful for a few minutes of your time to discuss the importance of reforming property taxation as we seek to level up our country equitably and successfully following the cv19 pandemic. 

It is my view that property taxation is long overdue radical reform. Council Tax is a poorly conceived method of funding local services and it enjoys almost no support from across the political spectrum, as reports from Institute for Fiscal Studies, IEA, IPPR and Resolution Foundation, amongst others, demonstrate. It also sees areas of the country with greater property wealth paying relatively less in Council Tax as a percentage of residential values. The effective tax rate on residential property is just 0.2% in London compared to 0.7% in the North East. Stamp Duty meanwhile acts as a simultaneous break on social mobility and willingness to downsize. Recent Stamp Duty announcements are welcome, but they have not addressed the fundamental inequities associated with taxing property transactions.

I have been working with Fairer Share, who have called for the replacement of Stamp Duty and Council Tax with a Proportional Property Tax. Their calculations suggest that, if levied at 0.48% of estimated property value, approximately 18 million households in England will see a reduction in their tax bills. This policy is revenue neutral as savings are offset by increases for multiple homeowners, foreign property investors, land banking developers and those residing in the most expensive properties (with deferral options available for the elderly and asset rich/cash poor). The campaign's petition has already received over 45,000 signatures, garnering a great deal of support in the regions. Some, of course, will argue that this is a wealth tax, in my view it is no more so than Business Rates, which is also a proportionate property tax. 

I have discussed the proposals with colleagues and there is support for simplifying property taxation whilst making the system more equitable. It is vital, as we recover from cv19, that we continue to level up those areas repeatedly and scandalously left behind. I see this as a fair and fundamentally Conservative way to put more money back in people's pockets and for them to spend as they see fit as they ultimately know best. I look forward to hearing from you.

Yours sincerely,

Kevin Hollinrake MP

Member of Parliament for Thirsk & Malton

by The Fairer Share Team