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Instead of a system based on outdated property valuations, which means council tax paid on the nation’s most expensive homes has lagged far behind their soaring values, the government should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  • Support levelling up, by more accurately reflecting the variation in house prices across England than the outdated council tax system, with the highest taxes being levied proportionately upon those with the most property wealth.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.”