Economic management is quickly becoming the defining factor of this Government. Penned in by tax pledges, and with less room to borrow than previous administrations, the choices which it is making to free up funding for cash-starved public services is having severe political effects.
Increases in employers’ national insurance contributions (NICs), a freeze in Personal Independence Payments (PIP), and limiting the eligibility of the Winter Fuel Allowance have all been deeply unpopular and cut through with voters.
Creative solutions to find money are required, and looking at the antiquated way in which housing is taxed could not only free up more money for public services, but result in direct cash benefit for lower income households.
How do we currently tax housing?
Broadly in the UK housing is taxed in three ways.
First, all voters pay a portion of the value of their house in council tax (total value: £32.7bn/year). The calculations around council tax are somewhat byzantine. Rather than being directly proportional to property values, homes are put into ‘bands’ based on the value of the home in 1991 and have taxes levied on them on this basis. A home worth £320,000 in my home borough of Haringey, for instance, pays 1.4% of its value every year in council tax, while one valued at £68,001 pays 3.2%.
These taxes have also exacerbated existing regional inequalities, with households in the North East paying 18% more than households in London after years of successive increases, despite the fact that house prices have increased in London and the South East significantly more than they have in the North in this time.
Home buyers also pay a portion of the value of their new home in Stamp Duty (total value: £11.6bn/year). Stamp Duty is widely criticised as a tax on housing mobility, rather than a tax on housing wealth, which disincentivises moves such as downsizing, which could have a positive effect on the overall housing market.
Finally, Inheritance Tax (IHT, total value £6bn/year) is increasingly a tax on housing as the value of homes has increased and the threshold for paying IHT has been frozen since 2010. The number of estates liable for IHT has increased from 15,000 in 2009/10 to 27,800 in 2021/2, the percentage of estates paying IHT is estimated by the Institute for Fiscal Studies to increase from 4% currently to 7% in 2032.
Both council tax and inheritance tax are rated by voters as among the most unpopular according to polling by YouGov, with 45% of voters perceiving them as unfair.
How could these be reformed?
All three of these taxations are ripe for reform, and tackling unpopular levies is a clear way for Labour to show itself as embracing its change mantra and challenging existing unfair structures.
But doing so will inevitably create losers as well as winners, and so any changes must be carefully thought through.
Commonly-suggested ideas for council tax reform, for instance, have included updating the valuations from their 1991 basis, and making them directly proportional to property value, rather than putting homes in crude bands. Reforming council tax would disproportionately benefit the poorest households, but some poorer households, particularly living in London’s warped housing market, would also be liable for higher bills.
Meanwhile, reforming Stamp Duty would likely lead to lower receipts in the short-term but have a more positive impact in the long run. Ideas for this have included introducing an option to defer payments over a longer period as part of a gradual move to levy a much smaller rate annually, rather than to levy higher charges at the point of sale.
Doing so would both benefit younger people more likely to be making their first purchase, as well as older people looking to downsize, but making the final move to an annual levy on all homes would have substantial political risk.
Tackling IHT may be considerably simpler. Of the 27,800 estates which paid IHT in 2021/2, the 3,153 estates worth over £2 million paid over half of the £6 billion collected in that year. Introducing graded bands for estates under this level, while levying higher taxes on this upper level would give a default tax cut to tens of thousands of people a year during one of the most emotionally difficult times of their life, while shifting the burden to a group most would see as super-rich.
However, the Government’s recent moves with tapering IHT zero-rating for farms and businesses has shown that any tinkering with so-called ‘death taxes’, even when levied on households with higher levels of assets, can be politically dangerous. So even this taxing double-millionaires at a higher rate may well have political risks.
None of these options are necessarily easy, but in a time of increased fiscal strain and in the aftermath of a number of politically difficult tax rises, creative thinking around taxation is more important than ever. And, as the housing market continues to represent a substantial source of wealth, how this is taxed in a sustainable fashion needs to be in our national discussion.