CIOT/IFS debate: Outdated property tax system ripe for reform

The panel for Reforming the taxation of housing – what changes should the Chancellor choose?, chaired by CIOT President Nichola Ross Martin, featured:

• Stuart Adam, Senior Economist, Institute for Fiscal Studies
• Caroline Fleet, Head of Real Estate for Crowe UK and Vice Chair of CIOT’s Property Taxes Committee
• Professor John Muellbauer, Senior Research Fellow of Nuffield College and a Senior Fellow of the Institute for New Economic Thinking at the Oxford Martin School
• Lord Turnbull, former Treasury Permanent Secretary and Cabinet Secretary

Stuart Adam said a “huge number” of potential changes to taxes on property had been discussed in the media in the build-up to the Budget, but he would focus on the “fundamental issues”.

Beginning with council tax, he said there are three main issues – the tax is based on valuations from 1991, which is “ludicrously indefensible”, it’s a regressive tax with wildly different levels depending on which band a property is in and, Adam’s “personal bug bear”, the 25% single person discount, which benefits properties with higher council tax. “That encourages single adult households to live in properties that are bigger than they otherwise would,” he said.

Moving on to stamp duty land tax, he said there was only one problem: “that it exists”. He said SDLT “discourages transactions” and stops people moving to different areas, such as for work or retirement. “If you just abolished it in isolation, it would make the housing market function much better,” he added. “But it would also be a big giveaway to the owners of very valuable houses.”

Adam said the IFS has previously argued for a reformed council tax which would charge people a proportion of the up-to-date value of their property. He added that media speculation on raising council tax for the top band of homes would raise revenue but would not address the “flaws” in the current system.

Adam said that landlords, who are taxed income tax on their rental income and capital gains tax on rises in property value, are both “undertaxed and overtaxed”. He said investment in property is “penalised” in comparison to other avenues such as gilts, and heavy taxes on landlords also result in higher rents for tenants.

Concluding, Adam said a higher annual property tax would do less economic damage than other tax rises, and also called for action to address the “underlying principles” of council tax, rather than just “tinkering” with the rates.

Professor John Muellbauer said he had been campaigning on the issue of property taxes since 1987. He proposed council tax reform on an initial “small set” of properties, those in bands G and H, with a 0.5% proportional tax rate on primary residences and 1% on second homes.

He said a deferral scheme is a “crucial element” of any tax reform, to address those who are “cash poor, property rich”, and suggested a 0.6% stake of the property to the tax authority for each year of deferral – so, for example, if the property was sold in 10 years’ time, 6% of the amount it was sold for would go to the tax authority.

Prof Muellbauer added that it was “really crucial” that SDLT was reformed at the same time, branding it an “absolutely terrible tax” which “stagnates markets, prevents mobility (and) prevents the economy from adjusting”.

Returning to council tax, he criticised the UK’s banding system, not used elsewhere in the world, for creating “cliff edges” and leading to those with very similar circumstances paying “hugely different” rates of council tax. “It’s about time we started to simplify that system,” he added.

Caroline Fleet said while the discussion so far had focused on council tax and SDLT, there were actually 12 taxes to look at when considering residential property, including residential property developer tax, corporation tax and VAT. She said: “Whatever reform is looked at in terms of taxing residential property, it needs to be looked at in the overall context of all those taxes.”

She added that some taxes differ on what they consider to be residential property, and called on policy makers to ensure any reform has “consistency and reduces some complexity”.

Returning to SDLT, Fleet said that when she started in tax, “no-one really talked about it”, but now working out what SDLT is due can be “far more difficult”. She praised the administration of SDLT, saying any reform would require a robust administration system to ensure it did not result in “chaotic” problems similar to those when capital gains tax was introduced on residential property in 2020.

Lord Turnbull, who joined the panel to replace Heather Stewart, economic editor of the Guardian (who was unwell), traced the history of property taxes with governments from the Sixties and Seventies onwards. He said the “real catastrophe” was the replacement of the poll tax by council tax in 1993. Since then, he said, the development of council tax seems like a “random walk” rather than a “process of intelligent design”.

Lord Turnbull said that, since 1970, there has been an “astonishing reversal”, with earned income now more heavily taxed than unearned income. “I can’t see any justification for this,” he added.

He said housing has two functions – a roof over your head and a store of value, but the latter was “consistently prioritised” and house prices in Britain are “extraordinarily high” compared to other countries. He added that this disincentivises selling, as those staying in a property for longer are likely to see an increase in the value.

Watch a recording of the debate.