This article first appeared on Politics.co.uk on November 24th 2021, written by Tom Spencer, chief organiser of the London New liberals.
Boris Johnson is facing calls from more than 40 cross-party MPs to table legislation to stop the use of UK property for economic crime and nobody should be surprised. The size of the ecosystem profiting from our housing shortage by investing in prime London real estate cannot be understated and the Prime Minister should act immediately to tackle criminal behaviour lurking within it. But he should not stop there. We also need to fix the property tax system to ensure that all overseas non-resident investors pay up appropriately.
Data from Hamptons indicates that more than half of property purchases in prime London are by overseas investors; and, only 30% of these buyers are actually resident in the capital. From this we can estimate that around 20% of all sales are going to non-resident foreign buyers. This is why as much as one in five properties in the City of London are second homes.
This is particularly concerning given how often these investments are used to facilitate economic crime, with such ease of entry into the market lending itself to money launderers and fraudsters to use property for their personal gain.
Yet even if we ignore the criminality, the London housing market still provides a wonderful opportunity for investors to make money without actually doing anything productive. In real terms since March 1970 the average house has increased in value sixfold, this means investors can purchase a home, barely use it, and sell it on later for massive profits. All while contributing absolutely nothing back to society. And declining interest rates have made it easier for the wealthy to borrow against their existing assets in order to make more and more investments.
This is not a phenomenon that occurs internationally. In New York a 0.71% tax on annualised property values ensures that if one chooses to engage these rent-seeking tactics, then society is suitably compensated. The same occurs in Paris thanks to their wealth taxes on property. In contrast, London does absolutely nothing to stop these practices. Here, a rich Qatari family may buy prime retail estate through a shell company and not even have to pay any stamp duty.
It does not have to be this way. By copying the approach taken in New York we can tax non-resident overseas investors and both create a disincentive from them hoarding property, and if they choose to still invest, then ensure that the public is properly compensated for their rent-seeking.
"Given that around 5% of the value of the housing market is held by foreign non-resident buyers, valued at around £400 billion, a tax of just 1% of property values would raise as much as £4 billion every year."
This could be the first step towards much-needed reform of the entire system. For the past year, political support has been growing for the Fairer Share campaign to replace council tax and stamp duty with a simple tax of 0.48% on property values, with a surcharge rate of 0.96% on overseas non-resident investors.
As well as helping to address London’s problems with overseas investment, this would help to resolve many other challenges. For example, research estimates that anywhere from 170,000 to 600,000 more homes could be built as a result of this policy with the majority of these being in London and the South East.
The benefits won’t be restricted to London. Areas such as Norfolk and Cornwall have seen large increases in second home ownership which in turn prices out local residents. We know that outright bans simply shift the demand onto the existing stock making the situation worse for homeowners, but a proportional property tax would really help to level the playing field.
Moreover, where council tax under-taxes those in expensive homes, stamp duty penalises people for moving at all. This reform would provide an incentive for those in London’s 600,000 under-utilised homes to downsize, allowing those in overcrowded homes to upgrade more easily. As the cost of living crisis bites. it would also mean lower bills for 76% of households. On average, households would pay £435 less property tax a year under a system of proportional property tax.
The Prime Minister should take the action being asked of him to stop the use of UK property for economic crime. He should also commit to learning lessons from New York and taxing non-resident overseas investors. And if he really wants to deliver more homes, welfare gains and a fairer system across the country, he should commit to fixing property taxes across the board.
Leading LVT Campaigners | Fairer Share's Proportional Property Tax provides pathway to LVT
The UK’s tax system is not fit for purpose. It is complicated and is therefore regularly avoided and evaded. It discourages good investment in economically deprived areas and encourages land speculation which can make available premises too expensive for our future budding entrepreneurs.
Land owners suck the natural resource wealth from our economy that should be collected to replace unfair taxes such as Council Tax. An annual Land Value Tax would be the best mechanism to start rectifying this historical wrong whereby big owners of land not only have the advantage of controlling its use but reap the huge economic benefits of holding land – taking land wealth that is created by all of us in society. Support for a more progressive policy on property tax could also be a way to unite the Labour party around a radical vote-winning reform.
The Labour Land Campaign has been campaigning for Land Value Tax since 1983. At this year’s Labour Party conference, we shared a stall with the Fairer Share campaign which is backing a proportional property tax (PPT) which would be a simple flat rate of 0.48% on the value of a property.
The discussions around PPT naturally led on to the question “why include the building in valuing domestic properties for PPT?” That is a good question because why would we want to penalise owners of good buildings that are attractive with enough, well-proportioned rooms for their families, that use water economically, have good insulation and which enjoy green energy.
Supporters of an annual Land Value Tax (LVT), whereby all land is valued at its optimum permitted use and an annual levy is charged, argue this very point but many recognise the value of PPT and how its acceptance as a good replacement for Council Tax naturally leads a pathway to supporting an annual LVT not just on residential land but on all land. LVT will bring idle development sites into full use, see empty or underused buildings fully occupied, encourage the beneficial use of land in our towns and cities which will reduce the demand to build on green spaces or greenfield land thus protecting both our countryside and urban green lungs. Land speculation will become unprofitable and empty flats bought in the expectation that land values will increase, will become much needed homes.
As well as discouraging home improvements another problem with PPT replacing Council Tax is that the Treasury will need to redistribute from Councils with a PPT surplus to Councils with a deficit.
In the past brilliant new initiatives were piloted by local Government long before they were adopted by Westminster. For example, many councils opened local hospitals and clinics giving free health treatment decades before the NHS was introduced by the 1945 Labour Government. Similarly, town planning, bus passes for pensioners, electricity generation, police forces, cheap fares on public transport with integrated ticketing were all pioneered by progressive local authorities. Even the pilot study for the hugely successful Eden project in Cornwall was funded to the tune of £26k by Restormel Borough Council in the mid-1990s. Whitehall, and especially The Treasury, has never been known for blazing a new trail or taking risks and without an independent local tax base giving councils the ability to respond to local ideas and demands, the UK could lose future creative experiments that ultimately benefit everyone.
We envisage PPT providing a pathway to LVT whereby local authorities collect PPT but in addition (and maybe at a later date) the national government could introduce LVT on all land throughout the country. The economic merits for taxing land rents have been acknowledged by most thoughtful economists from Adam Smith to many Nobel prize winners such as William Vickrey and Joseph Stiglitz. Unlike taxes on wages or production LVT does not distort the economy and any effects it has on individual behaviour is entirely beneficial as using all land and natural resources more efficiently not only recognises their scarcity but also creates useful employment and protects green spaces. An Annual Land Value Tax is not only the best wealth tax (you can’t hide land like a valuable painting or cash) but it is unique as taxes go as LVT is actually a wealth creating tax.
Where there are examples of residential owners genuinely not being able to afford an increase in their PPT or LVT bill over what they currently pay under Council Tax, the unaffordable bill can be “rolled-over” to be paid when the home changes ownership. Local Authorities can still borrow against this anticipated future income as happened with Transport for London’s Supplementary Business Rate levied on just a few commercial properties to part-fund the building of the Elizabeth line.
Organisations that support an annual LVT vary in their make-up and include a broad spectrum of political groups, environmental campaigns, those arguing for fair taxes, business representatives, housing campaigns and so on, they argue LVT is not a “left-right” issue but it is a “right-wrong” issue.
By working together, the success of Fairer Share’s Proportional Property Tax should lead its supporters to understand the relevance of land wealth in the economy and support the arguments for an annual Land Value Tax to replace current property taxes and other distortive taxes that discourage good behaviour and reward bad behaviour.
Dave Wetzel, Vice Chair, Coalition for Economic Justice (www.c4ej.com) and Heather Wetzel, Vice Chair, Labour Land Campaign (www.labourland.org)
The Government is running out of excuses for sticking with the status quo.
Government response to the HCLG Select Committee report on local authority financial sustainability and the section 114 regime - a response from Fairer Share
The Government is missing a clear-cut opportunity to level up by refusing to consider the Housing, Communities and Local Government Select Committee’s suggestion that it should consider options for wider reform of council tax, including a proportional property tax. What’s more, the Government’s explanation for why it is sticking with the status quo does not stand up to scrutiny.
1. The Government states: “Council tax provides stable income for local authorities to deliver a range of vital local services, and predictable bills for taxpayers."
With upwards pressures on spending forcing councils to raise ever more revenue through council tax, it is surely debatable as to whether the levy provides stable income for local authorities. Also, there is no reason why council tax would provide local authorities with more stable income than would be the case with a proportional property tax. To ensure stable and balanced revenues, we propose that in areas where proportional property tax revenue is higher than that raised by council tax, the extra will be used by central government to compensate councils which raise less in proportional property tax than they do in council tax.
As for the claim that council tax provides predictable bills for taxpayers, the only predictable thing about many council tax bills is the unfairness that is baked into them. Based on property values that are thirty years out of date, council tax ensures that households in low-value homes must pay out a far higher share of their property’s value in tax every year than those in more expensive homes. It also hits renters saving up for a deposit just as hard as those who have made it onto the property ladder.
2. The Government states: “A revaluation would be expensive to undertake and could result in increases to bills for many households.”
At some point the Government will have to undertake revaluation. Using 1991 house values will just entrench and worsen existing inequalities and seem ever more outdated and ridiculous. Letting this problem slip into the future is short-termist and will be harmful to the Government and the Conservative Party’s manifesto commitment to level up.
We commissioned the well-respected International Property Tax Institute (IPTI) to write a 200-page deep dive into the issue of valuation. Other jurisdictions manage to provide accurate valuations of the capital values of their properties – Netherlands, New Zealand, British Ontario, New York. For a country that prides itself on data analytics and AI your concerns around valuation are insufficient.
In IPTI’s view, the introduction of PPT poses no insurmountable technical or valuation issues. As we have already stated, much of the rest of the world operate similar systems and they have proved reliable and sustainable.
There are implementation costs to be considered but, in comparison with the potential revenue to be derived from PPT, they would appear to provide good value for money in terms of cost/yield ratio. The Government already collects the requisite data at the VOA. To undertake a PPT it is a case of using the data correctly.
One thing that we do know about households bills that would result from the system we propose it that most would go down. Around 19 million households in England (76%) would gain under a proportional property tax, seeing a reduction in the amount of tax they pay on their primary residence.
3. The Government states: “The creation of higher council tax bands, which in itself would require a revaluation, may penalise people on fixed incomes, including pensioners, who could face a substantial tax rise without having the income to pay the higher bill.”
While a minority of people in valuable homes would see their bills go up after a revaluation, the Fairer Share system has built in safeguards to ensure that there are no losers on day one of a proportional property tax being implemented. For those staying in a high value home and paying the new tax, losses would be capped so that, at the point of transition, no household sees an increase of more than £100 per month on what they currently pay. But to ensure there do not have to be any losers on day one, there would be a deferral mechanism until point of sale on a low interest rate, so that nobody has to pay out immediately if they cannot afford to do so.
It is true that some asset rich, cash poor homeowners in valuable properties would see their bills go up under a system of proportional property tax. But many more people would see their bills go down and the alternative is sticking with a system which penalises renters and hard-pressed families in lower value housing.
4. The Government states: “Given that council tax is retained locally, a revaluation would not address the disparity between strength of council tax base and need.”
Again, this is misleading. Following a revaluation, under the Fairer Share model councillors would be able to set their own rate within a nationally-agreed range, maintaining vital local democratic connections (see more here). This would leave councils in a stronger position than now. Currently, councils can increase council tax a certain amount set by government, with central funds making up a large proportion of council budgets. With a proportional property tax, councils will still have flexibility within a nationally-agreed range and central redistribution will continue to make up a large slice of budgets.
The real difference with the new tax is that it will put cash in the pockets of the local people who are struggling the most, boosting local businesses and allowing councils to deliver better services.
What is perhaps most telling is that the Government’s 234-word defence of the current system does not mention the word fairness once. But perhaps we should not be surprised when we have such an outdated and unjust system. Nevertheless, the Government’s position is completely at odds with the its stated desire to level up the country. As council tax continues to rise, hitting hardest on renters and homeowners in lower value properties, we can clearly see that it has the effect of levelling down rather up.
It is evident from the Government’s response to the HCLG Select Committee that excuses for sticking with the status quo are running out. As the “cost of living” crisis hits households up and down the country, now is the time for ministers to take action where they can. That must mean killing off council tax and stamp duty and bringing in a system of proportional property tax that we know would bring about lower bills for most households.
Tom Spencer | Who wins gains? How capturing land value can revolutionise our infrastructure
This article first appeared in CapX on October 19th 2021, written by Tom Spencer, chief organiser of the London New liberals.
With the Government’s much-vaunted commitment to ‘Levelling Up’, public investment in infrastructure is all the rage. But who really reaps the reward when the state doles out taxpayers’ cash on improving our roads, railways and so on?
The simplest answer is that the benefits accrue to taxpayers themselves, both in terms of faster and more convenient travel and, in a broader sense, from a more productive economy. But on an individual level those gains are trifling compared to the gold-rush that new infrastructure can bring property owners in the vicinity of, say, a new train line.
With the Government’s much-vaunted commitment to ‘Levelling Up’, public investment in infrastructure is all the rage. But who really reaps the reward when the state doles out taxpayers’ cash on improving our roads, railways and so on?
The simplest answer is that the benefits accrue to taxpayers themselves, both in terms of faster and more convenient travel and, in a broader sense, from a more productive economy. But on an individual level those gains are trifling compared to the gold-rush that new infrastructure can bring property owners in the vicinity of, say, a new train line.
The basic idea is that government can offset the cost of construction against future revenues from business rates paid by firms operating in the area that benefits from new infrastructure. As Browne notes, TIF is particularly attractive because it doesn’t require any tax increases or funding from existing taxpayers.
From TIF to PPT
That still leaves us with the issue of capturing the surge in the value of residential properties, especially in London and the south-east, where homeowners have benefited from huge investments in projects such as Eurotunnel and Heathrow Terminal 5.
Given these unearned and largely untaxed gains it does not seem particularly fair that property owners pay a lower tax rate than other parts of the country which have not benefited from the same level of public investment. And, of course, the higher property prices in London and the south-east have made ownership much more challenging for younger generations and low income workers.
So how could we go about taxing that uplift in a sensible way?
The existing council tax system certainly isn’t fit for purpose, not least as it is based upon valuations conducted 30 years ago. As a result we now have a situation where residents in areas with high house price growth tend to be undertaxed. Absurdly, the wealthiest homeowners in Westminster, for example, have ended up paying less tax than the least wealthy homeowners in Hartlepool.
A better idea, advocated by campaign group Fairer Share, is to scrap Stamp Duty altogether and replace council tax with a Proportional Property Tax (PPT) of 0.48% tax on annualised property values. This means that when a new tube line is built next door to a house, and the value subsequently doubles, the owner’s tax bill will increase to reflect that.
Given that such a change would hurt the ‘asset-rich, cash-poor’ – such as pensioners with expensive homes but only a modest income –Fairer Share have suggested that tax increases should be capped at £1,200 a year. Those unable to afford that increase would have the option to defer the bill until the point of sale. Even so, the vast majority of people won’t need these protective measures and 76% of households would see an immediate reduction in their tax bills.
Taken together, Tax Increment Financing and a Proportional Property Tax offer innovative, fair and efficient ways of capturing the gains from new construction. With the Prime Minister faced with the twin challenges of levelling up and balancing the books, he could do a lot worse than giving both a try.
Numerous leading economists and property experts have displayed their support for reforming the UK's property taxes, replacing Council Tax and Stamp Duty with our Proportional Property Tax.
Carol Lewis | Deputy property editor, The Times and Sunday Times
From its early stages, Carol has covered our campaign in The Times and Sunday Times. She also featured on a panel with our founder, Andrew Dixon, at the Conservative Party Conference in 2021 - here is her review, including the need to reform Council Tax with a Proportional Property Tax:
Property news from the 2021 Conservative Party conference
Martin Wolf | Chief economics commentator at the Financial Times
Martin Wolf's support for property tax reform pre-dates our campaign as he has been writing about the scourge of Council Tax for a number of years. In one of his more recent contributions to the debate, he said: " The Fairer Share manifesto provides a compelling attack on council tax. It should be reformed."
Now is the time to reform the UK’s dysfunctional tax system
Russell Lynch | Economics Editor, Daily Telegraph
Russell Lynch wrote during the height of last year's Stamp Duty holiday: "Stamp duty can’t be considered in isolation. A proper approach would see a comprehensive review of all property taxes. Top of the list would be replacing the manifest unfairness of a council tax based on 1991 property valuations."
Stamp Duty should be scrapped and the whole property system reformed
Sir James Mirrlees | British Economist and winner of 1996 Nobel Memorial Prize in Economic Sciences.
In 2010, the Institute for Fiscal Studies wanted to undertake a review of the UK's tax system. The panel was chaired by Nobel Memorial Prize winner, Sir James Mirrlees. The Mirrlees review said that Council Tax was "regressive without good reason" and that Stamp Duty is "inefficient and badly designed tax on transactions."
Read a summary of the Mirrlees Review
Mirrlees Review of tax system recommends radical changes
Paul Cheshire | Emeritus Professor of Economic Geography, LSE and Christian Hilber | Professor of Economic Geography, LSE
As part of Bright Blue's cross-party Tax Commission, Professors Cheshire and Hilber led a report seeking to identify the best system for property tax reform. On the release of the report, Professor Cheshire said: “With these reforms, we have aimed to strike a balance between what is economically efficient yet also politically feasible. Moving to an APPT fulfils both of these criteria, as well as having a role to play in addressing regional inequalities. These reforms will result in a system of property taxation that is fairer, greener, helps deliver more new homes and is simpler and more transparent than the one we have now.”
Home truths: options for reforming residential property taxes in England
Fairer Foundations | Support for PPT at Conservative conference fringe event
A Conservative MP, a peer, a campaigner for affordable housing and a senior property journalist on The Times all spoke in favour of a proportional property tax at a Conservative party conference fringe event hosted by leading centre right think tank, Bright Blue.
Alongside Andrew Dixon, founder, and chair of Fairer Share, on the panel for the event were Aaron Bell, Conservative MP for Newcastle-under-Lyme; Lord Willetts, President of the Resolution Foundation; Anya Martin, Director of Priced Out; and Carol Lewis, Deputy Property Editor at the Times and The Sunday Times.
The discussion covered the unfairness of the present system, how the introduction of proportional property tax would be consistent with Conservative party values, why it would also make electoral sense for the party to support PPT and why successive governments have shied away from much-needed property tax reform.
The consensus was that the time has come for action on our unfair property taxes. Or as Aaron put it: “If not now, when?”
Current challenges
Bright Blue’s Phoebe Arslanagić-Wakefield, summarised the current challenges, “There is now a consensus that Council Tax is poorly designed. The valuation has not been updated since the '90s. And that's despite the astronomical boom and house prices we've seen since then, especially in the South. That has led to serious regional imbalances in terms of the burden that Council Tax presents to taxpayers, surely an important question for the Conservatives in terms of levelling up. Many economists argue that Stamp Duty impedes and distorts housing prices, making it more difficult for homeowners to decide to downsize or indeed move up the housing ladder and slowing down the market.”
Fairness
There was widespread agreement that the present system is not working and that a proportional property tax is a much fairer solution.
Aaron gave the example of households owning a £100,000 property in his constituency. “There are plenty of £100,000 properties in Newcastle-under-Lyme. They pay five times more (in Council Tax) as a proportion of property value than someone who owns a million-pound house down in London. So, there is a real unfairness there,” he said.
Anya described the current system of property taxation as “totally backwards”. She noted that Stamp Duty discourages and disincentivizes housing transactions and that Council Tax is equally bad.
She said: “It's unfair you can tax properties worth millions of pounds at a higher rate even than small family homes in Sunderland or wherever. These two taxes jointly make moving very expensive and staying very cheap, even if you're occupying more space than you actually need or even want in very high-demand areas.
“So, it's bad for people who want to move, it's bad for the distribution of homes, it's bad for under occupation and overcrowding, and it's bad for the supply of homes as well, because it incentivizes people to have second homes or even leave homes empty when actually you could incentivize them to do otherwise, which is why we support Fairer Share.”
Similarly, Carol stated: “I am in favour (of the Proportional Property Tax) because I think it's a lot, lot fairer than what we've got…I think what we want is we want more people to be able to own property so that they can bequeath it to their children, and that's ultimately what we're trying to achieve here. Rather than have the huge divide between those who have and can inherit and those who can't and won't.”
Tory values
Lord Willets also explained to delegates how the introduction of proportional property tax would be consistent with Conservative party values.
He said: “Property-owning democracy is one of the great Tory slogans. And when I was working for Margaret Thatcher in the 1980s, we had council house sales, and ownership of property and ownership of shares spread.
“I think one of the long-term challenges facing our party is the retreat of property ownership so that younger people are less likely to own a property. This is very dangerous for the long-term future of conservatism. We've got to help young people get started on the housing ladder, and this tax would bring more houses onto the market and would mean that people in low-value houses will not be paying so much tax.”
In a similar vein, Aaron added, “If we don't start trying to work out how we can treat the younger generation more fairly in these matters, then they're not going to grow up to be Conservatives.”
Anya reminded the audience that “young people are very, very angry about their housing circumstances.”
Vote winner
Carol summarised the audience of the key benefits, “75% of households would be better off. £6.5 billion per year being saved by Council Taxpayers outside London. Up to 600,000 homes would be released into the market over the course of the next five years. And we would see a £3.27 billion per year increase in GDP from the increased housing market.”
As well as being consistent with Tory values, Aaron argued that it made electoral sense for the party to support the Proportional Property Tax.
He said: “I don't see any reason why the Conservative Party couldn't do this and especially when they have a very large majority, and actually, I think this is a policy that does attract widespread support from anyone who listens and thinks about it.
“We've got here is a load of MPs who can make a lot of noise on behalf of the winners, because we've suddenly got a lot of MPs, who will be represented constituencies where 99% of people are winners, and that'll put more money in their pockets and more money into our local economies.”
He added: “If we don't look at this and the Labour Party gets there first, how are we going to argue against that? And how much damage is that going to do in all the seats that we've won? We've got to hold on to seats like mine if we're going to have a majority next time.”
Fear factor
Lord Willets set out a key reason why the current system has remined in place, despite its clear shortcomings.
“Council Tax goes back to one of the biggest traumas in the history of the post-war Conservative Party,” he said. “There are people around, you can watch their faces turn pale when you talk about Council Tax… There's a kind of almost irrational fear now of doing anything about this because it was also painful in the 1980s.”
“I think there are quite a few people in the Treasury who would like just to get some rather better capital taxes than we have now. So, I think it is now an issue that can be approached, provided we realize there are people out there with post-traumatic stress syndrome who will need massive calming down through the process.”
On the same theme, Aaron suggested ministers lack the courage to take action.
Now is the time
Carol said the time had come for ministers to take action on property taxes. “I think 30 years without addressing it - it's time to do it. Now is the time. We can't wait another 20, 30 years. I think the Conservatives are going to have to do it,” she said.
Lord Willetts gave a compelling reason why the time has come to reform property taxes. He said: “The total wealth we had, our houses, and our pensions used to be three times our national income. They now reach seven times our national income.” He added that this means that “if you are looking around for taxes that you need to raise, it is striking how the proportion of GDP taken in taxes on property in the broadest sense has not gone up at all. This policy is in the political interests of the Conservative Party. It makes both economic and political sense.”
Anya captured the mood, “We need to abolish Stamp Duty. We need to reform Council Tax, replacing them with the Proportional Property Tax. It’s a really fantastic policy.”
Aaron also pointed rising property values as a key reason for reform. “The fact is that no government had the courage to revalue council tax ever since 1990, in which time property values have soared in the south east… There's a real unfairness issue that I think is long overdue for addressing,” he said.
He also said his party should act now if they are to help voters in the red wall seats that the party won in the last election.
“If not, now, when? We've got representation in seats we've never represented before. We're representing lots of people who live in £50,000 houses, £30,000 houses, who are being essentially screwed over by the system. And it's time we did something about that.”
You can watch the event in full below:
Property tax would bridge the wealth gap between ages | Lord Willetts
A shorter version of this article appeared in The Times on October 4th 2021, written by Lord Willetts, President of the Resolution Foundation.
It is more than ten years since I published The Pinch, setting out how huge intergenerational injustices were opening up across Britain. Or to use the more provocative wording on the cover, how baby boomers took their children's future - and why they should give it back.
Since then others have produced important works about the difference between the generations in the UK. The latest is Generations by Bobby Duffy. He argues that there are not wider cultural gaps between parents and their children. I am sure he is right on that – the big shift towards more liberal attitudes occurred with the Boomers in the 1960s and since then the generational gap has been much smaller . Indeed there is something in the Ab Fab meme– young people are so much more serious-minded than we Boomers were when we were young.
None of this however changes the reality of a big and growing economic gap between the generations. For example Bobby Duffy cites Resolution Foundation evidence that Millennials are around half as likely to be homeowners than generations born only a couple of decades earlier.
Intergenerational fairness has risen up the agenda in recent years, but it has been harder to take the action needed to bridge the divide. We hear a lot, rightly, about levelling up the regions of the UK but far less about levelling up the generations.
The proposals on social care did make some modest steps in the right direction. At one point it looked as if the measures would be funded simply by increases in conventional national insurance which really would have been a direct generational transfer. But then the Government decided the levy will also be paid by working pensioners who do not pay employee national insurance. And the levy is to be applied to dividend income so at least there is to be a contribution from owners of assets who are disproportionately old.
There is however one big issue which is getting worse and at some point is going to have to be addressed – Council Tax. It is based on property valuations from 30 years ago and is deeply regressive. Lower value properties pay much more proportionately than high value properties. The system is particularly hard on young people, who are renters and dreaming of owning a home of their own but still pay the tax.
There is a way to fix the council tax problem. Support is growing for replacing council tax and stamp duty with a proportional property tax. Previous research has shown that a Proportional Property Tax set at about 0.5 % of a property’s value would deliver lower bills for three quarters of households, while reducing them to zero for renters.
Now, new research from the Fairer Share campaign shows it would also pave the way for the release of many thousands of extra homes for young people and families who need them. In the most optimistic scenario, almost 600,000 homes would be released within five years of such a tax being introduced to replace the other two taxes. Of these it is estimated that around a quarter of a million would be one and two bed homes suitable for first-time buyers. A similar number would be three bed homes for young families to move into.
If the generation gap is not to widen further in the years ahead then politicians cannot afford to ignore these kinds of policies. We need a massive boost to home ownership. When I updated The Pinch in 2019, I said that political parties should use the upcoming election to start healing these divides with a policy programme that appeals to and benefits young and old alike.
At next week’s Conservative party conference, we will hear more about how the Government’s levelling up agenda will attempt to close Britain’s deep-rooted prosperity gaps. The challenge is ensuring that the levelling up agenda also goes some way to closing the widening generational gap in the UK. A reform of council tax contributes to both sorts of levelling up. It eases the burden of tax in areas with more low value properties and it also eases the burden on young people especially renters. Of course there is tricky politics as some people have to pay more. But they are outweighed by the numbers who pay less. And we end up with a system which helps the very groups Tories know we have to win over.
David Willetts is President of the Resolution Foundation. A second edition of his book The Pinch was published in 2019.
Fairer Share Report | Council Tax overhaul could free up 600,000 homes on to the market
A new report from Fairer Share and WPI Economics found that thousands of homes for first time buyers and young families would be freed up by scrapping council tax and reforming the property tax system.
Read the full report | Taxing Times: A fairer deal for future generations
The report reveals that bringing in a proportional property tax could release up to nearly 600,000 homes in total - including more than a quarter of a million one and two bedroom ‘starter homes’.
In many cases, dwellings would be released by encouraging people to sell their second homes through higher taxation of these properties.
The latest findings put further pressure on ministers to bring in a proportional property tax which is backed by think tanks including the Institute for Public Policy Research and the Centre for Policy Studies and by several Conservative and Labour MPs. The Ministry of Housing, Communities and Local Government Select Committee has also urged the Government to consider PPT as an option for wider reform of council tax.
Campaigners are calling for the abolition of council tax, stamp duty and the bedroom tax and the introduction of a PPT set at a flat rate of 0.48% of a property’s value. The policy would mean higher bills for second home owners but lower bills for 76% of households in England.
The new report by WPI Economics considers how many homes would be released as a result of increased transactions brought about by PPT. It also estimates how many dwellings would be released thanks to more second homes becoming available, empty homes becoming easier to sell and more homes being built sooner.
Under the most pessimistic assumptions, 175,000 homes would be freed up over the five years after PPT was introduced. In the most optimistic assumption some 595,000 homes would be released throughout England.
Within this figure, it is estimated that there would be 255,000 one and two bed homes for first-time buyers and a further 249,000 three bed homes for young families to move into.
Top 10 local authorities with most homes released after introducing proportional property tax:
- Cornwall UA - 15,057 homes released
- Birmingham - 9,021
- Leeds - 7,694
- Bournemouth, Christchurch and Poole - 7,386
- Dorset UA - 7,341
- Manchester - 7,073
- Bradford - 6,261
- Tower Hamlets - 5,967
- Durham UA - 5,962
- Northumberland UA - 5,945
In London, up to 47,000 one and two bed starter homes would be released - more than any other part of the country. There would also be up to 32,000 larger homes freed up in the capital.
Across England, Cornwall emerges as the local authority area in which most homes would be released with the figure standing at 15,057. This is in part due to the high number of second homes in Cornwall that would be released on to the market as primary residences under PPT.
Andrew Dixon, chairman of Fairer Share, said:
“By sticking with the current unjust and outdated council tax regime, ministers are effectively sticking two fingers up at young people in this country.
“Scrapping council tax and implementing a proportional property tax would not only deliver lower bills for most households, while reducing them to zero for renters. Our report shows it would also pave the way for the release of many thousands of extra homes for young people and families who need them.”
“If the Prime Minister really believes in levelling up then he should prove it by making property taxes fairer for everyone. The reality is that the levelling up agenda is doomed to fail without a fundamental reform of the property tax system.”
Simon Fell, Consevative MP for Barrow & Furness said:
“The current system of council tax is outdated and unfair. Introducing a simpler and fairer property tax system could reap huge benefits for millions of people across the country making it transparent and fairer for all, and especially lifting a disproportionate burden from the young. As we look to level up across the UK, I can think of a few measures that would better demonstrate to people that this government is determined to deliver on its promises to people who lent us their vote in 2019.”
Rt Hon John McDonnell, Labour MP for Hayes & Harlington and former Shadow Chancellor of the Exchequer said:
“Analysis from the Fairer Share campaign shows that moving to a proportional property tax would not just mean lower bills for most households, it would also free up thousands of homes for people who need them.“
Lord Willetts, Conservative peer and president of Resolution Foundation’s intergenerational Centre, said:
“The cost of housing is holding back the younger generation. We need to get more housing onto the market for them. A Proportional Property Tax is key to this. It would replace council tax which has become increasingly regressive and is particularly hard on young people. I welcome this important report.”
IPPR Report | Replace ‘unfair and outdated’ council tax with a tax directly related to value of every home
The 30-year-old council tax should be scrapped, along with stamp duty, and replaced by a new tax, based directly on the value of every home, according to a report from IPPR.
Read the full report | Pulling Down the Ladder | The case for a proportional property tax
Instead of a system based on outdated property valuations, which means council tax paid on the nation’s most expensive homes has lagged far behind their soaring values, the government should introduce a proportional property tax (PPT), the think tank says.
If set at a flat rate designed to raise the same amount of tax as council tax and stamp duty combined, a PPT of around 0.5 per cent could mean three quarters of households in England paying less than now, IPPR argues.
Making the change would help tackle regional inequalities, with people living in areas with lower house prices likely to gain, compared to those in regions such as London and the South East where prices are highest. It would also be fairer, with the best off paying more compared to the current system - under which the lowest earning households (by income decile) pay around twice as much council tax as the highest, as a proportion of their income.
It looks at three main options for reform: a new proportional property tax (PPT) alongside stamp duty abolition; a land value tax; and ending the capital gains tax exemption on the sale of anyone’s primary home. It also examines the option of further amending council tax by introducing new, higher bands for the most expensive homes. In its report IPPR also analyses in detail a specific proposal for a proportional tax alongside abolishing stamp duty on residential property sales, put forward by the Fairer Share campaign group.
It concludes that a PPT would be the best option for addressing wealth and regional inequality, while also driving better use of the UK’s existing housing stock and leading to a more balanced housing market. According to the IPPR analysis, introducing the new tax in this way could:
- Support levelling up, by more accurately reflecting the variation in house prices across England than the outdated council tax system, with the highest taxes being levied proportionately upon those with the most property wealth.
- Reduce tax bills for most households, making poorer households better off by putting more disposable income into their pockets. Under the Fairer Share proposal, the new tax would be set at 0.48 per cent in order to be revenue neutral, and more than 75 per cent of households would gain.
- Spur more efficient use of existing housing, leading to fewer houses remaining empty or under-used in high demand areas of the country.
- Encourage a rebalancing of property values across the country, with prices likely to fall in the long run in expensive areas compared to those elsewhere.
- Stimulate the economy, with poorer households that gain from the tax reduction likely to spend more of their extra disposable income.
The report acknowledges that there would be practical issues to address, including a new mechanism for redistributing the increased revenue from areas where property values are high, to areas where lower values will yield less tax than under council tax. It also examines ways to soften the immediate impact on owners of high-value homes, who could otherwise see their tax bills leap overnight, and concludes that there are several options.
It calculates that a PPT would lead to the biggest house price falls – up to 3 per cent – in areas of London and the East and South East, while the 10 most affected areas, primarily in the North East and North West, could see rises of up to 11 to 15 per cent. Such increases could incentivise increased house building, the report notes. IPPR analysis of these house price increases finds the biggest rises would be concentrated in areas where home are currently most affordable.
Shreya Nanda, IPPR economist and author of the report, said:
“The housing market has been almost entirely responsible for growing wealth inequality since the 1970s. Over this period, while consumer prices have increased by a factor of 11, house prices have increased a staggering 60 times. These gains should have been shared fairly across society, but instead they were captured by older, wealthier homeowners and landlords.
“Those who did not own property during the long house price boom have been locked out, and too many face steep rents, cramped flats, and eye-watering mortgages. A proportional property tax would instead ensure that these gains were shared more fairly across society.”
George Dibb, head of IPPR’s Centre for Economic Justice, said:
“Council tax is unfair and outdated. It’s based on property valuations from 1991 and poorer households pay a higher percentage of their property value in tax.
“It’s time to replace it with something fairer: a proportional property tax would be more equitable, with all households paying the same rate and would help address regional inequalities in housing wealth. To raise the same amount of revenue as council tax and stamp duty, a proportional property tax would mean lower taxes for 75 per cent of households.”
