Londoners paying £3.1bn too little in property tax, says report

Londoners are underpaying billions of pounds in property taxes, while the rest of the country is overpaying in return, according to new research.

A new report by the Resolution Foundation suggested that residential property taxes have become so far removed from modern house prices that Londoners are underpaying by as much as £3.1billion relative to the value of their homes.

It argues that Council Tax and the main rate of residential Stamp Duty in England are so poorly designed that they widen regional inequality, hold back growth and stop people moving home.

Britain currently raises more tax from property than most advanced economies, at 3.7% of GDP against an OECD average of 2%, the think tank went on to highlight.

Regressive tax

It says that the system has become deeply regressive, largely because Council Tax still fails to reflect almost four decades of house price growth.

A regressive tax it one that takes a larger percentage of income from low-income earners than from high-income earners because the effective tax rate falls as a person’s income rises.

The Resolution Foundation suggests that by the end of the decade, someone living in a home worth £100,000 will typically pay almost three times as much tax relative to its values as someone in a £1milliion property.

The regional differences are stark. While 80% of London households benefits from the current system, 85% of households in the North East are on track to overpay – by an average of £710 a year by 2030 to 2031.

Only two thirds of households in England, outside of the capital, overpay compared with a genuinely proportional property tax, the think tank claims.

Our two main housing taxes – Council Tax and Stamp Duty – are terribly designed, grossly unfair and economically harmful.”

The Foundation is calling for a shift to a proportional property tax, with Stamp Duty on primary residences scrapped.

It suggests a revenue-neutral replacement levy of 0.7% of a property’s value, alongside a rebate scheme for those on low incomes and a deferral scheme for those who are asset-rich but cash-poor.

But it warns against moving too quickly, saying that simply announcing the abolition of Stamp Duty would gum up the market, hand existing homeowners an undeserved windfall and leave a £15billion hole in the public finances.

The Budget

Instead, it calls on the Chancellor to set out a roadmap in next month’s Budget, starting with an up-to-date database of property valuations to provide an evidence base for an independent commission.

To avoid destabilising the market in the meantime, the report suggests committing to no changes to Stamp Duty rates and thresholds for the rest of this Parliament.

Hannah Aldridge, Senior Research and Policy Analyst of the Resolution Foundation, (pictured), says: “The UK raises more tax revenue from the homes we live in than most other advanced economies.

“Unfortunately, our two main housing taxes – Council Tax and Stamp Duty – are terribly designed, grossly unfair and economically harmful.

“Our housing taxes fall heaviest on those least able to afford them and have turned into a huge £3.1billion subsidy for those living in London – paid for by households across the rest of England.

“The economic and fairness case for overhauling our housing taxes are clear.

“But the politics of reform has got hung up on those who lose out – such as those living in gentrified areas of London – even though most households in England would pay less tax.

“Housing taxes cannot be fixed overnight. But the Chancellor should set out a sensible roadmap to reform in the Budget next month.”