tax Archives - Red Brick

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.

To make the recovery fair we need to tax land

Landowners aren’t paying for the crisis. But they should be paying for the recovery.

Amid the carnage of lost jobs, bankrupt businesses and an overrun health service, one thing hasn’t changed: rent is still due.

That is not to say it shouldn’t be – as others have argued, there are wide ranging consequences from cancelling rent, that could have adverse effects for working people, and the labour movement as a whole.

But as with so many parts of our economy, landlords profit from others work. When someone takes a risk and starts a business, property values go up. When you renovate your house, property values go up. When the government invests in schools, transport, or a public park, property values go up.

And every time property values go up, so does rent.

When we pay rent, we’re not only paying landlords for the property we live in, we’re paying for our own taxes being invested in parks, services, and roads. We’re paying a windfall to landowners, regardless of the work they put into the property, or the quality of the service they provide.

Land isn’t like other parts of the economy. If people need more TVs, cars or computers, we can always make more TVs, cars or computers. But we can’t make more land. We have to do as much as we can with what we have. So as people need more housing, and more importantly, housing close to their work, friends and family, they become willing to pay more in rent – driving up prices to extortionate levels.

It’s why, even as jobs have been lost, businesses have closed and services strained, rent has stayed the same. As we begin to rewire our economy after the crisis, we need to recognise that landlords have earned

Rather than use a land tax, as some have proposed, to revamp local government funding, it should instead raise money for central government. It should be set at the same rate – say 1% of land value per year – across the country.

When property values go up – be it from government investment or new jobs and businesses in the area, landlords pay more tax, because their asset became more valuable. Doing so would be vital to reorienting our economy in the wake of our current crisis.

First, it would make tax fairer – shifting from those who earn, to those who own. Our government is funded on the backs of those who earn a wage, rather than those who pay their wages, or the owners of assets. A land tax would begin to change that.

Since 1997, the average house price has risen 259%, while the average earnings have only risen 68%.^[1] If a land tax is used to fund a tax cut for working people, it will assuage fears of an increased tax burden, and leave the landowning middle class no worse off than they were before.

Second, it would redistribute wealth to the regions. Land in poorer areas and outside the main cities is worth less, and so would be taxed less. The effect would be more investment in rural areas, as businesses and workers alike respond to the incentives, and purchase land away from the main centres of economic growth.

Third, it would help counter the housing crisis. A land value tax, which should apply only to unimproved land, rather than the property as a whole, is designed specifically to encourage landowners to build more houses. When you renovate your kitchen, the value of the land underneath your home stays the same, and so your tax bill doesn’t change.

The more people living on a plot of land, the lower the tax bill per person will be, which makes higher density apartments more affordable than singe family houses. Denser cities are better for the climate, easier to get around in, and most importantly, have more housing for those most in need.

Finally, it would lower rents for everyone. Rents, which are driven not by the quality of housing, but by the value of land, would already be helped by encouraged density and discouraged property speculation. But unlike other taxes, landlords can’t pass a land value tax onto tenants.

The market is already so skewed towards landlords, that rent is based on what tenants can pay, not the expenses of landlords. And a tax applied to all land is a tax that cannot be avoided – you can’t store land in the Cayman Islands, nor can you make less of it.

Directly, rent makes up as much as half of the cost of living for working families. Indirectly, it shows up in everything from groceries to electronics. In London, a third of the price of a cup of coffee is just paying the rent.

Skyrocketing rents have crushed the high street and the family chequebook, priced aspiring workers out of jobs, and a generation out of its first homes. As we rebuild our economy in the wake of a pandemic, it’s time landowners paid their fair share.

Joe Pagani

Joe Pagani is a political strategist with a background as a New Zealand Labour Party activist and political commentator.
He is a member of Bethnal Green and Bow CLP.

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^[1] https://www.theguardian.com/money/2017/mar/17/average-house-price-times-annual-salary-official-figures-ons