We have appreciated the support and encouragement of leading think tanks and academics. We have been excited by our engagement and interaction with leading MPs from across the political spectrum. 

Feedback has been extremely positive. And we welcome this review of our policy undertaken by Neil O’Brien, the MP for Harborough, Oadby and Wigston.

We feel it is only fair to him and also to our many supporters, who will want to make sure they are backing the right horse, that we examine Mr O’Brien’s concerns in detail. We have responded in a Q&A format below:

Neil O’Brien MP

I read the proposal with interest and it raises important points about fairness in our tax system. However, as I understand it, evidence about how the proportional property tax would work in England shows that a lot of places that are low-income areas but also experiencing rising house prices would be hit very hard, even places with high levels of deprivation and low household incomes. If house prices were to rise in an area, low-income households would quickly see their bills rise at staggering rates well above increases to their income.

Fairer Share

Should a similar argument also apply to Council Tax?

Not only is Council Tax out of date, it also taxes tenants – those who don’t even own the property – rather than owners, hitting the asset-poor and income-poor. Given rising levels of Council Tax debt, it clearly does not take into account ‘the ability to pay’, a problem worsened by recent Council Tax increases that have exceeded current levels of inflation.

With our proportional property tax, those living in houses valued at £500,000 or less (90% of all households in England) are likely to see a reduction in their tax bills because the future tax will be less than their current Council Tax payments. Therefore, low-income households are more likely to benefit from a very real reduction in their bills.

In the rare situation of low-income households living in high value homes the increase in tax would be capped, so that at the point of transition, no household would see a rise of more than £100 per month (£3.29 per day). And we would provide these households with the option to roll over the tax payment, at a modest interest rate, until point of sale or change of ownership. 

Indeed, this would go a long way to alleviating the challenges faced by the rural poor. One of the issues for the rural poor is poor cash flow, the ability to roll over a tax burden into a highly-priced asset would improve their liquidity and reduce their Council Tax burden.

And to be clear, any debts built up as a result of deferring a payment would be considerably lower than wealth gained from rising house prices. Assuming 4.8% annual house price inflation, housing assets would increase at 10 times the speed of any tax liability. House prices would have to increase at less than 0.48% per year for the tax debt to exceed the value of the housing asset.

Therefore, those living in a modest home will see a reduction in their tax bill. Those owning a larger property can either choose to pay the additional charge, which even for the largest and most valuable homes would be capped at a £1,200 increase per year or they can choose to defer payment until they sell the property.

Within Mr O’Brien’s constituency of Harborough, for example, someone living in a modest band A property pays 0.90%, whereas someone in a higher band H property pays just 0.22% of the property value. In other words, it would appear that Council Tax is a wealth tax that perversely places the greatest burden on those with the least wealth in the first place. We have been inundated with stories from supporters who are struggling to find the money to pay their Council Tax bills.

We all want to live in a fair society, and paying the same rate of 0.48% of the property value is surely better than the current system, where someone in Barnsley pays 1% and someone in Battersea pays 0.1%.

Mr O’Brien is right to point out the hardship of low-income households but Council Tax has become a wealth tax for modest and low-income households and remains a simple service charge for the wealthy.

Neil O’Brien MP

Another issue to consider is that excessive council tax increases are kept in check by referendum principles, which could not be done under the proposed property tax system. If house prices begin to rise in an area, low-income households would quickly see their tax bills rise at staggering rates well above increases to their income.

Fairer Share

It is for this reason we have a fixed national component which would go to central government for redistribution and an initial floating local component which would go to the local authority and could subsequently be moved up or down by that authority. In this way local authorities retain flexibility over taxation and voters can still judge them on value for money. As happens now, there could be limits on how this flexibility to set local rates is used, including the requirement to hold a local referendum if it is proposed that the local share of the tax was to be raised above a certain limit. The Local Government Chronicle covered these important issues in this review.

Neil O’Brien MP

Even if the new proportional tax was to be paid by property owners rather than tenants, it is highly likely that this would simply be passed on back to tenants in rent increases, as property owners still need to make mortgage payments.

Fairer Share

Yes, property owners are very likely to pass some or all of the tax down to the tenant through higher rent. 

Keep in mind 75% of properties will see a reduction in Council Tax. Therefore, it is likely that the landlord will pay less property tax than the tenant is currently paying in Council Tax. As a result, the tenant will receive a net gain as future rent (incorporating the proportional property tax) will still be less than the current rent plus Council Tax.

Households are already paying sufficient property taxes – the problem is that the wrong households are paying the wrong taxes at the wrong times. The current inequity exists within individual constituencies, between regions, and between the generations.

Neil O’Brien MP

On second homes and vacant homes, 95 per cent of second homes are already charged full council tax and vacant homes can be charged double the council tax rate if these are empty for two or more years. Council tax is a valuable source of revenue for local councils and it is important that they have the discretion to raise or lower council tax rates based on the needs in their local area.

Fairer Share

Yes, it is for this reason we have a surcharge rate of 0.96% for second and vacant homes, and for foreign buyers.

Under a proportional property tax – as historically has happened within local government finance – some councils will receive additional funding from other parts of the local government finance system. The size of this additional funding would be based upon an assessment of the difference between a council’s resources (its tax base) and spending needs. As the Institute for Fiscal Studies note, if local tax bases change in size when reforming local taxation and resource equalisation is still a desirable aim of policy then it would require funding levels to adjust, “…increasing them for those [local authorities] whose tax base falls, and reducing them for those whose tax base rises.”

While the exact approach to this adjustment would depend on the context of local government finance at the time, an underlying principle would be to take account of the relative size of a council’s proportional property tax base, and not the revenue that a council intends to generate from that tax base. What this should mean in practice is that two local authorities with similar tax bases and a similar assessment of relative need would receive broadly similar baseline funding levels, irrespective of their local proportional property tax rates.

In conclusion, there is a growing political consensus that both Council Tax and Stamp Duty need to be reformed. As we begin to look beyond Covid-19 and deal with the inequalities that the pandemic has accentuated, we should seize the opportunity to scrap both of these taxes and bring in a fair and workable system of property taxation.

In his recent op-ed piece in the Daily Telegraph, Mr O’Brien’s colleague, Aaron Bell, who took Newcastle-under-Lyme from Labour for the Tories at the 2019 election, said: ‘…abolishing Council Tax and Stamp Duty and replacing them with a fairer property tax is the right thing to do for millions of people up and down the country. It is also the right thing for the Conservative Party to do if we are serious about delivering to those who voted Tory for the first time in a generation.’

We are indeed grateful to Mr O’Brien for taking the time to analyse our Proportional Property Tax recommendations. As we can see from our Constituency Data, under a proportional property tax, 88% of all the households in Mr O’Brien’s constituency would benefit from an average annual saving of £400. Furthermore, 95% of households living in bands A-D would be better off. 

We encourage Mr O’Brien to take another look at our proposals and we welcome further input.