A think tank has called for a new property tax to be introduced based on the present-day market value of homes.
Stamp duty and council tax should be scrapped and replaced with an annual property levy on homeowners, a think tank has proposed.
The new tax would be based on the present-day market value of people’s homes, under the plan put forward by the IPPR.
The group said if the levy was set at 0.5% of a property’s value, it would raise up to £1.6bn more than council tax currently does, while a higher rate could be introduced to replace the revenue raised through stamp duty.
It added that the tax, which would not be paid by people living in rental accommodation, would help to tackle growing wealth inequality in the UK and be fairer to those on lower incomes.
Why is this happening?
The IPPR said council tax was a regressive tax, as it falls disproportionately on those with lower incomes and wealth, while the property valuations upon which it is based have not been updated since 1992.
Carys Roberts, senior economist at IPPR and co-author of the report, said: “A new property tax would be far more progressive, and would effectively capture increases in house prices in a way that the current system does not.”
Stamp duty has also previously been criticised as acting as a tax on mobility. The new tax would overcome this issue.
Under new proposals the property levy on this semi-detached home in Richmond Chase, Surrey - on the market for £2.3m - would be £11,875 per annum
Who does it affect?
If the proposals were brought in, they would be good news for people living in areas of the country where house prices are lower, as they could end up paying less each year than under the current system of council tax.
But those in very high value properties may have to pay more. For example, council tax on a £1m property in Reading is currently just under £3,500 a year, but under the proposed scheme it would be £5,000 per annum if the rate was set at 0.5%.
However, the IPPR said variable tax-free allowances could be introduced to help offset regional house price differences.
Local authorities could also have some discretion over the level at which they set the tax to reflect public service needs.
The tax would be a further blow for buy-to-let investors, as, unlike council tax, the new levy would be paid by the property’s owner not the person who lived in it.
But the group suggested someone with a high value property who was on a low income could defer payment of the tax until either their home was sold or they died.
What’s the background?
The IPPR said wealth was currently twice as unequally distributed as income, with the top 10% of households owning 44% of wealth, while the bottom 50% owned just 9%.
Homeownership had once helped to reduce wealth inequality, but rising house prices, alongside falling rates of homeownership were now exacerbating it.
It said while property owners had seen their wealth and income grow, increasing numbers of people were unable to get on to the housing ladder and were stuck paying rising rents.
Since 1997, average house prices have risen four times faster than typical full-time earnings. The IPPR argues that its proposed property tax would help to capture some of these financial gains, while it would also dampen future house price inflation.
It said housing was currently under-taxed compared with other assets, and the situation distorted investment behaviour and contributed to growing wealth inequality.
Top 3 takeaways
- Stamp duty and council tax should be scrapped and replaced with an annual property tax for homeowners.
- The IPPR said the new levy should be based on the present-day market value of people’s homes.
- If the new tax was set at 0.5% of a property’s value, it would raise up to £1.6bn more than council tax currently does.