Proposals for Property Tax Reform: Levelling Up, Promoting Fairness and Stimulating Economic Growth

Simon Fell, MP for Barrow and Furness, led a Westminster Hall debate on the future of Council Tax and Stamp Duty in Parliament on Wednesday 17th May. There was widespread cross party support for Fairer Share’s Proportional Property Tax. Below are the key conclusions drawn from this important debate

In his speech advocating for property tax reform, Simon Fell highlights the flaws and inequities of the current property tax system and presents a solution aimed at unleashing savings, promoting equity, and stimulating economic growth. Fell acknowledges the historical challenges associated with property tax reform, referencing the poll tax riots as a cautionary tale. However, he emphasizes that the current property taxes disproportionately favour the wealthy, burden lower-value homes, discourage efficient housing use, and penalize homebuyers and sellers. These issues impact all constituencies and hinder the provision of local services and infrastructure.

Council Tax
Council tax, introduced in 1993 as a replacement for the unpopular poll tax, has become increasingly dissatisfying to the public. Surveys reveal that only 29% of people consider council tax calculations fair, with 33% supporting the status quo. The burden falls heavily on the young, low earners, and residents in less prosperous regions, while benefiting wealthy homeowners and property investors. The outdated property valuations and the band structure contribute to the unfairness of council tax. For example, a person in a £100,000 property pays roughly five times more tax relative to property value than someone in a £1 million property. Such disparities are far from a fair tax system.

Stamp Duty
Stamp duty, often considered council tax’s accomplice, exacerbates the housing crisis by discouraging property transactions and hindering efficient property use. While it has progressive rates for larger transactions, it still poses barriers to homeowners looking to downsize or upsize, affecting job opportunities and overall housing market activity. Fell argues that abolishing stamp duty on owner-occupied properties would alleviate the housing crisis and promote housing stock utilization. However, he suggests retaining stamp duty for second home and non-residential buyers to address issues specific to certain communities, such as the hollowing out of villages due to second homes and holiday lets.

The Proposal
Proportional Property Tax (PPT) System To address the inadequacies of the current property tax system, Fell proposes a move to a proportional property tax (PPT) system. He cites the Fairer Share methodology as a concrete solution, replacing the convoluted band system with a simple flat tax of 0.48% of property value, with a 0.96% surcharge for second homes, empty homes, and non-residential properties. The benefits of such a system would be significant: 18 million households would experience a tax reduction, with an average annual saving of £556 per household. Additionally, council tax payers outside central London would save £6.5 billion annually, providing a substantial boost to local communities and economies. The reform would also exempt over 750,000 house buyers from paying stamp duty, simplifying, and reducing the cost of house buying. The increased housing market activity is estimated to contribute to a £3.27 billion boost in GDP per year.

Impact on Second Homes and Empty Homes:
Moreover, the PPT system would ensure that 1.4 million second homes, empty homes, and undeveloped properties contribute their fair share of tax, with the generated revenue used to lower bills for all taxpayers. This would incentivize owners to rent, sell, or develop these properties, thereby increasing the housing supply. Fell highlights that the reform would generate an annual surplus of £5.4 billion through surcharges on second homes, empty homes, and foreign-owned homes. This surplus can be utilized by the government to address various pressing needs. Shifting the tax burden to owners aligns with international practice and also eases administration for local councils.

Mitigations for Potential Impact:
Fell acknowledges that any wide-ranging reform will have winners and losers. To address concerns about potential higher taxes for individuals, he proposes several mitigations to soften the impact. These include the introduction of a transitional period, extending the period for any tax increase over a certain threshold, and allowing homeowners to defer payments until a property is sold. Additionally, the government could explore options such as a temporary subsidy for certain groups to ensure a fair transition and alleviate any short-term financial burden.

Local Government Finance and Redistribution:
Regarding the impact on local government finance, Fell proposes central government grants or funds redistributed from councils generating higher PPT revenue to supplement the shortfall for councils generating less revenue. This would ensure that no local authority faces significant financial challenges due to the reform. Additionally, a portion of the generated surplus could be allocated to local authorities to support community projects, infrastructure development, and public services.

Political Support:
Fell noted that politicians from various parties, along with think tanks like Bright Blue, IFS, IPPR, and campaign groups such as PricedOut, Generation Rent, and Intergenerational Foundation, have endorsed the transition to a proportional property tax. He went on to say that prominent economists from respected publications including The Financial Times, The Daily Telegraph, The Economist, and The Guardian have given their endorsement to this reform.
The proposed property tax reforms have gained support from multiple Members of Parliament across party lines. Aaron Bell, MP for Newcastle-under-Lyme, sees the alignment of the reforms with the government’s levelling-up agenda and supports the proposal’s potential benefits for his constituents.

Tim Farron, MP for Westmorland and Lonsdale, describes the current council tax system as regressive and ineffective, supporting the use of sliding scales and surcharges to ensure a fair contribution based on property value and ability to pay.

Jill Mortimer, MP for Hartlepool, highlights the unfairness of disproportionate council tax costs in her constituency compared to her London flat and supports the proportional property tax proposal.

Some MPs go even further in their criticisms. Mary Kelly Foy, MP for the City of Durham, criticizes the regressive nature of council tax and calls for a more progressive system that adequately funds local governments.

Peter Gibson, MP for Darlington, criticizes the fundamental flaws of the council tax system and advocates for alternatives, emphasizing the potential savings for his constituents.

Richard Burgon, Labour MP for Leeds East, calls for more progressive alternatives to council tax and suggests implementing real wealth taxes on the super-wealthy.

Kirsty Blackman, SNP Member of Parliament for Aberdeen North, notes that in Scotland, they have a different system with council tax known as the land and buildings transaction tax (LBTT), which was introduced in 2015. Blackman highlights that the LBTT is more proportionate to property prices compared to stamp duty in England. In Scotland, 40% of homebuyers do not pay any LBTT, and for properties below £175,000, which is the range for many first-time buyers, no LBTT is payable.

Responding to Helen Morgan’s suggestion of linking stamp duty and similar taxes to the energy performance of buildings to encourage retrofitting and meet carbon targets, Blackman finds the idea novel and worthy of consideration.

Blackman mentions ongoing discussions in Scotland regarding council tax reform, acknowledging that the current system is not as fair as it could be. The Scottish Greens, SNP, and the Convention of Scottish Local Authorities are working on short-term and long-term reforms for council tax. Blackman notes that council tax in Scotland is significantly lower than in England, with an average difference of £600 for a Band E property. While Blackman acknowledges that Scotland’s system is still not as fair as desired, she emphasizes the commitment to making necessary changes and ensuring a more equitable tax system.

However, not all MPs are fully on board with the proposed reforms. Chris Loder, Conservative MP for West Dorset, calls for a review of the revenue support grant and supports a comprehensive review of council tax and its contributing factors.

James Murray, MP for Ealing North, emphasizes the need to address the cost-of-living crisis and criticizes the government’s handling of council tax and stamp duty, calling for fairer and more effective alternatives.

Andrew Griffith, the Economic Secretary to the Treasury, acknowledges the concerns raised and highlights the importance of council tax and stamp duty as fundamental taxes. He expresses caution regarding the potential consequences of certain reforms on local authorities and suggests exploring solutions that promote downsizing. Griffith assures that the government will continue to listen and consider the various proposals and concerns raised.

The proposal for property tax reform, presented by Simon Fell, provides a compelling case for transforming the current property tax system. The Proportional Property Tax (PPT) system offers the potential to unleash savings for millions of households, promote equity by ensuring a fairer distribution of the tax burden, stimulate economic growth through increased housing market activity, and address the inefficiencies of the existing council tax and stamp duty regimes. While concerns and opposition exist, the support garnered from MPs across different political affiliations underscores the urgent need for a comprehensive review and reform of property taxation in the United Kingdom. The government’s commitment to considering alternative proposals and engaging in further dialogue represents a positive step toward achieving a fairer and more effective property tax system.