Taxing questions

Originally written as a column for Inside Housing.

Around £50 billion worth of austerity looks inevitable in next week’s Autumn Statement but it remains to be seen how chancellor Jeremy Hunt will strike the balance between spending cuts and tax rises.

Even if recent reports that suggest he will increase benefits and pensions in line with prices prove to be correct, there are still big questions over local housing allowance (still frozen despite rising rents) and the benefit cap (which will catch thousands more tenants if the thresholds stay frozen) and housing budgets already eroded by inflation look vulnerable to cuts in capital spending.

On tax, the stamp duty cut was one of the few measures proposed in the mini-Budget in September that has survived the demise of Liz Truss and Kwasi Kwarteng. So far at least.

But there has been very little debate about where the tax burden should really fall, and in particular about the balance between taxes on income and taxes on wealth.

There is a strong case for the latter: the Institute for Fiscal Studies argues in a report published on Wednesday that the period since the financial crisis has seen rising asset prices boost the wealth of older people even as the real incomes of younger people have stagnated.

And the sums involved could be huge: Tax Justice UK argues that the government could raise up to £37 billion a year from wealth taxes. 

Much of that wealth is in housing. Savills estimates that the total value of the UK housing stock rose to £8.4 trillion in 2021, of which £6.2 trillion was owner-occupied.

The Office for Budget Responsibility estimates that council tax will raise £41.9 billion this year (net of any discounts) and that property transaction taxes (stamp duty etc) will raise £17.1 billion (perhaps £12 billion of which comes from residential property).

But almost everyone agrees these are bad taxes: council tax is regressive and based on property valuations not updated since 1991 and stamp duty acts as a barrier to home moves and labour mobility.

Some receipts from inheritance tax can be added to the pot, along with taxes paid by landlords, but this still suggests an effective tax rate of perhaps 7-8 per cent on residential property.

Some idea of the scope for extra revenue can be gained from Treasury estimates of the value of existing tax reliefs. Private residence relief from capital gains tax (CGT) was said to be worth £28.4 billion in 2020/21 and VAT relief on the construction and sale of new homes was estimated at £14.8 billion.

Designing a new tax system for property wealth would be a complex proposition. For example, few would support increasing the price of a new house by 20 per cent and few people think CGT could be levied on main residences without roll-over relief when people move (otherwise transactions would collapse) that would reduce the revenue raised by perhaps £10 billion.

Not included in those estimates is relief from the Schedule A tax on imputed rents that was levied on housing until 1963 (this is what mortgage tax relief was originally relieving). The 2017 UK Housing Review estimated that this was worth £19 billion in 2015/16, more than the £11.9 billion value of CGT net of roll-over relief.

And there are options out there that could raise revenue at the same time as they improve the workings of the housing system.

A land value tax (LVT), for example, could replace business rates and stamp duty (as recommended by the Mirlees review of the tax system in 2010) and help drive the more productive use of land and the buildings on it and therefore growth.

Gains made by landowners could also be taxed more effectively. As John Muellbauer argues in the Financial Times this week, the government could reform the system of land value capture and compensation for landowners to tackle the high land costs that are at the heart of many of our problems. That could boost housebuilding, infrastructure and economic growth.

Meanwhile Fairer Share is a campaign with support across the political spectrum to replace the council tax, stamp duty and the bedroom tax with a proportional property tax (PPT).

Under its proposal, renters would pay no tax and owners would pay an annual PPT of 0.48 per cent of the value of their property – but it calculates that 77 per cent of owners would save money.

That idea is designed to be revenue-neutral but it could be tweaked to raise extra revenue and boost resources for cash-strapped local authorities at the same time as it removed the tax incentives built into the existing system for people to buy the most expensive home they can afford.

The same arguments can be made across advanced economies. In a report published in the summer, the Organisation for Economic Co-operation and Development found that ‘the way housing taxes are designed often reduces their efficiency, equity and revenue potential’.

It cited examples such as recurrent property taxes based on outdated property values (like the council tax), transaction taxes that reduce mobility (like stamp duty) and exemptions from capital gains tax (like principal residence relief).

Reform of property taxation would be far from straightforward but add all this together and the case for it looks compelling, with potential to raise revenue, boost inter-generational equity and make our housing system work better.

The problem up to now has been the overwhelming political arguments against even discussing taxes on the 65 per cent of us who own our home.  

But change is not impossible – just look at the way that mortgage tax relief was seen as politically untouchable in the 1980s but was eventually phased out by the Conservatives and Labour in the 1990s and 2000s.

Jeremy Hunt and Rishi Sunak probably won’t grasp the opportunity next week but they should. 


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