Property tax: What new homes levy could Andy Burnham back and how would it affect Londoners?
Now that Andy Burnham has made his home in No10, a new property tax could be on the cards.
“The LVT, an annual tax on the market rental value of land, would allow for the abolition of stamp duty – a tax on the aspiration of young people to put down roots and get on with life,” he said.
Later, he expanded on his calls for reform.
“I’ve long been persuaded of the argument for a Land Value Tax,” he said.
“[Council tax] is a highly regressive tax. I see a big case for land and property and business taxation to be changed.”
So what would a new property tax involve, and how would it affect Londoners?
Andy Burnham enters No10 with his wife Marie-France van Heel after becoming Prime Minister
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What would a new property tax look like?
Mr Burnham previously supported proposals for a proportional property tax (PPT) advocated by campaigning organisation Fairer Share, which have received cross-party support.
A PPT is not a pure land value tax (LVT), but a variation based on the value of properties.
Under the proposals, stamp duty and council tax would be scrapped, with homeowners instead paying a flat 0.48 per cent tax on the current value of their property.
This, says Fairer Share, is the rate required to match the revenue from the current system.
The tax would only be paid by homeowners, not renters, which Fairer Share says would benefit 8.7 million tenants around the country.
Homeowners would benefit from an initial cap, which means that the new tax would not cost more than £1,200 per year, or £100 per month.
Those moving house, meanwhile, will no longer need to pay stamp duty on their property purchase.
Under the proposals, second homeowners, foreign owners and empty properties will pay a higher rate of 0.96 per cent.
The revenue from the tax would be centrally distributed to local councils.
Having a single, centralised point of collection, says David Fell at Hamptons, is potentially much more efficient than 300 councils each collecting independently.
After a growing frenzy of speculation over whether Mr Burnham would back such major reforms, the new Prime Minister played down the likelihood of them happening any time soon.
“It’s just not the case that we are bringing forward plans, on that scale, at this moment in time,” he said, while stopping short of ruling out some form of new property tax.
Property prices have been falling in London
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Why is a new property tax needed?
The Fairer Share campaign’s main aim is to address inequalities in the way that property is taxed, where the owners of expensive homes pay less as a percentage of the property’s total value.
Council tax, for example, is based on an estimate of the property’s value in 1991, regardless of its current market value.
There are currently eight council tax bands, with the top bracket, Band H, having no ceiling above £320,000. This means that a £350,000 flat and a £10 million mansion would pay the same tax.
As a result, there have been repeated calls for reform in recent years, arguing that property taxes should more closely reflect property values.
Fairer Share estimates that its proposals would benefit 77 per cent of UK households —equivalent to 18 million people— with an average saving of £556.
Scrapping duty, it adds, would protect individual households from large bills when they buy a home, instead spreading the cost across the period of property ownership.
This, it argues, would remove a barrier to home ownership and make it easier for older households to downsize.
Londoners would be heavily affected by a new property tax
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What would a new property tax mean for Londoners?
The bad news is that any new property tax is likely to raise bills for many homeowners in the capital.
According to Fairer Share’s estimates, the average homeowner in the city will pay £260 more per year.
The reason for this is because properties in London and the South East have seen the greatest increase in value since 1991, with homeowners paying proportionately smaller council tax bills.
In Kensington and Chelsea, for example, where the average property costs £1.273 million, a homeowner would pay £6,110.40 under the new tax, which would initially be capped at £1,200. They would currently pay £3,286.88 a year in council tax.
“Lower income homeowners in higher value areas like London would be hit hard,” says Mr Fell.
“Typically, they can currently avoid paying stamp duty by staying put. Renters, who don’t currently pay stamp duty, may end up paying more, either in tax or via higher rents.”
If Mr Burnham decides not to go for a PPT, as signalled, he could rake in more for the Treasury with a series of other options.
They include possibly lowering the threshold for paying the “mansion tax” to £1.5 million or introducing higher council tax bands for expensive properties.
Stamp duty would be abolished under the proportional property tax championed by the Fairer Share campaign
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Is a new property tax a good idea?
On the plus side, analysts argue that removing stamp duty will encourage people to move house and help to stimulate the property market, which has broader economic benefits.
But, says Tom Bill, head of UK residential research at Knight Frank: “Annual revaluations will turn house price growth into an ongoing tax liability, which would inevitably affect decision-making.
“The psychological difference between a one-off stamp duty bill and a recurring tax charge means up-sizers could think twice, particularly in London and the south-east where payments are likely to be a proportionately larger share of income.”
There are also concerns about implementation, when some homeowners will already have paid stamp duty on their properties, and about how properties will be accurately valued, when homes on the same street can vary wildly in price.
As Mr Fell puts it: “Changes in values could mean uncertain income for councils and will be open to challenge.”
Mr Bill also cautions against the potential pitfalls of raising taxes for landlords and developers at a time when landlords are leaving the market and housebuilding is needed.
“At a time when many landlords are struggling to make things stack up financially, any further disincentive is likely to result in less stock and higher rents, which hurts tenants.”
“The concept of taxing the asset rather than the transaction is sensible as it would improve social and economic mobility, generate tax revenue in other areas like VAT, get rid of a universally disliked tax and ultimately generate a more stable flow of revenue,” he adds.
“However, cross-party support or not, proposals should feel politically neutral to avoid replicating the unintended consequences seen with stamp duty changes in the last decade by ensuring a liquid property market that raises as much for the Exchequer as possible, irrespective of your postcode, which would be a real break from the past.”
