Britain needs a wealth tax on property

The writer is professor of economics at Oxford university

As the UK government faces fiscal challenges, it is considering options to raise tax revenue that were previously off the table.

Proposals such as a 2 per cent tax on wealth over £10mn have made headlines. However, many expensive assets — such as paintings and yachts — are mobile, unlike fixed property and land.

Instead, the government should replace the top two bands of council tax, covering around 1.1mn properties in England and Wales, with an annual wealth tax of 0.5 per cent as well as a 1 per cent tax on all agricultural and unoccupied land valued above £40,000 per hectare. For non-UK taxpayers and owners of second homes, the rate would be 1 per cent, lower than typical US property tax rates. Crucially, the great majority of homeowners and farmers would be untouched by these reforms.

UK council tax is based on 1991 property valuations, grouped into eight price bands and paid by tenants. It is probably the world’s most unfair property tax: the poorest pay the highest tax as a percentage of property value and the richest the least. It is also unfair regionally. The tax revenue raised by a home in the top band is around £4,500 in Nottingham but just £1,060 in Westminster.

Governments tend to balk at wholesale reforms, even when winners outnumber losers. This is why stamp duty land tax, at high and progressive rates, affecting only a small number of property owners in a given year, has endured, despite its consequences for social mobility and economic efficiency. Losers, especially the wealthy, shout louder than winners. The outdated nature of property valuations creates additional problems. But politicians are fearful of the upheaval created by revaluation. By confining revaluation and reform to the top two council tax bands, the costs and political pushback would be limited. To protect cash-poor pensioners, payment deferral should be permitted until the property was sold, with a 0.6 per cent tax rate instead of 0.5 per cent for cash payers. For every year deferred, the tax authority’s equity stake in the property would rise by 0.6 per cent.

Estimates suggest such a tax could increase revenue from the two top council tax bands by as much as £9bn. Only revenue in excess of what council tax would have raised would accrue to the central government, ensuring that no local authority loses out. Tax collection, based on owners rather than occupiers, would be run by HMRC, not local authorities.

A fall in top-end property prices in London and south-east England would be likely to follow as the holding cost of ownership rises. However, a reduction in the highest stamp duty rates for expensive property, to a top rate of 5 per cent, would stabilise the market. (Those who have recently paid high rates of stamp duty will need reductions in future property tax liabilities.)

Several benefits would follow. Fewer luxury homes bought by foreign investors to park money will sit empty. With lower deposits needed to access a mortgage and lower stamp duty rates, housing affordability will improve for high earners — boosting future employment and income tax revenue. A shift in developer incentives away from luxury housing and lower local land prices in high-value areas should improve housing affordability more broadly.

A tax on current market values of non-residential land in expensive locations would also have widespread benefits. It would lower farmland prices potentially relevant for development, especially for projected new towns. Introducing holding costs on undeveloped land would facilitate land value capture — a crucial tool in supporting the government’s affordable housing plans — so that surrounding communities and society more broadly benefit from gains rather than letting existing landowners reap so much of the profits.

Many voters, as well as Labour backbenchers, feel that the new government has neglected issues of fairness. The proposed reform asserts fiscal probity while addressing this concern.

Letters in response to this article:

Why comparing council tax rates is a mug’s game / From Carol Reid, London SE9, UK

How pensioners may bear brunt of a property tax / From Jan Ledochowski, London KT3, UK