The Fairer Share Team

WATCH: Treasury Committee | Tax after Coronavirus

The House of Commons Treasury Committee held an oral evidence session on November 18th for its Tax after Coronavirus inquiry. Reforming Britain's property taxes was one point of discussion. Watch what Robert Palmer of Tax Justice UK and Arun Advani, Professor of Economics at the University of Warwick, had to say: 

Robert Palmer (Tax Justice UK)

Arun Advani, Assistant Professor, Department of Economics, University of Warwick

We look forward to seeing the Treasury Committee's recommendations for dealing with Britain's property taxes after Coronavirus. The evidence heard in this session, in addition to the written evidence we submitted should emphasise how important reform could be.

by The Fairer Share Team

MP urges govt to abolish council tax and stamp duty

This article was first published in the FTAdviser on 01/10/2020. The original article can be read here.

Kevin Hollinrake, who is the MP for Thirsk and Malton, urged the prime minister to replace the present system of council tax and stamp duty with what he calls a “proportional property tax” at a flat rate of 0.48 per cent annually.

This would be split between national government and the local authority, with 0.32 percent going to the latter.

The tax would be levied on the value of a person's property each year with those owning more than one home paying the levy on each property they own.

Deferral options would be available for the elderly and asset rich but cash poor.

He said under the current framework the effective tax rate on residential property in the North East of England was 0.7 per cent, but a mere 0.2 per cent in London, despite property values being higher in the south than the north.

This is because council tax is calculated based on the value of a property decades ago, rather than its value today, so the rise in London and south eastern property prices in recent years has not been reflected.

His plan would also involve taxing land banks owned by developers at the same rate.

In Mr Hollinrake’s letter to the PM, seen by FTAdviser, he wrote: “Stamp duty acts as a simultaneous break on social mobility and [on people’s] willingness to downsize.

"Recent stamp duty announcements are welcome, but they have not addressed the fundamental inequities associated with taxing property transactions.

"Some, of course, will argue that this [proposal] is a wealth tax, in my view it is no more so than business rates, which is also a proportionate property tax."

David Hollingworth, director of communications at mortgage broker London and Country, agreed stamp duty could be a reason why some older people don’t downsize, but he added: “There are a lot of moving parts to that, people want to preserve the home they have for their children to inherit, and quite often, the supply of properties for people to move into is not great, especially as people are active for much longer.

"Also lots of people, rather than downsize, release equity from their homes and use that to help the next generation.”

Mr Hollinrake’s letter to the Prime Minister was written in conjunction with the campaign group Fairer Share, which did the policy research for the proposal.

It calculated that, if levied at 0.48 per cent of estimated property value, approximately 18m households in England would see a reduction in their tax bills.

Despite this, the proposal would be revenue neutral, it would not cost the government money, nor would it generate extra revenue.

Mr Hollinrake’s letter asks for a meeting with Mr Johnson to discuss his plans in more detail.

by 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