UK chancellor Rachel Reeves has asked officials to draw up options for tax reform before the autumn Budget, with property levies a central focus.
With the Treasury facing a potential fiscal hole of more than £20bn, the chancellor wanted to both iron out inefficiencies in the tax system and raise near-term revenue, people familiar with the discussions said.
She is a long way from making any decisions, however, and by considering changes to property levies such as a ‘mansion tax’ she is wading into one of the most contested areas of UK politics.
Why is Reeves considering reforming property taxes?
Reeves has been hamstrung by Labour’s manifesto pledge to rule out increases to three of the biggest sources of revenue — income tax, national insurance and VAT.
As the public finances have worsened due to weak economic growth, officials have been looking at options that would allow Reeves to plug that gap while sticking to her election pledges.
Wealth taxes in general are popular with Labour backbenchers, but finance ministry figures are sceptical because they are seen as complex to introduce and administer. Business secretary Jonathan Reynolds has described them as “daft”.
Levies focused on property are seen as more fertile ground. The estate agent Savills has calculated the combined value of UK housing hit £9tn for the first time last year, compared with £3.4tn just a decade earlier.
Politicians across the spectrum also recognise that council tax and stamp duty are flawed and need to be reformed.
What changes could Reeves make?
The measures on the table range from introducing targeted levies on high-value properties to more wide-ranging reform of council tax and stamp duty.
Introducing some sort of “mansion tax” has established pedigree in British politics, having been discussed under the Conservative coalition government with the Liberal Democrats in the early 2010s and proposed by Labour in the 2015 general election.
Former officials stressed that such a tax had previously proven to be technically workable, meaning it would be a political decision as to whether to go ahead.
Deeper reforms to the property tax system are also on the table, however. In England, council tax, the critical levy on properties, is based on valuations from 1991, creating a distorted and regressive system.
Economists are also highly critical of stamp duty. Given this is levied on property transactions, it acts as a disincentive to people moving home — perhaps for a better job — fuelling arguments that it should be replaced by a less economically damaging levy.
How would a ‘mansion tax’ work?
Several options are available — one would be to raise revenue via capital gains tax. A person’s principal home is exempt from CGT, but the Treasury is examining whether that carve-out could be revoked for higher-value properties.
Yet such a move would be politically combustible. Capital gains tax on property is 24 per cent for higher and additional-rate taxpayers, and 18 per cent for those on the basic rate.
It is also unclear how much cash it would actually raise. Homeowners might respond by deciding to stay put.
Another option would be to introduce an annual tax on homes valued in the millions of pounds. This could be achieved via a fresh levy or through the existing council tax system. A partial revaluation of high-end property could be coupled with new council tax bands — although this revenue would in theory go to local authorities rather than central government.
What about deeper reforms?
When she was a backbench MP in 2018, Reeves wrote in a pamphlet that “council tax, based on 1991 valuations, is at the very least long overdue a re-evaluation and revision of existing bands”.
She added: “We should also consider the case for its overhaul and replacement with a property tax, levied on property owners. It would be more equitable and it would place the burden on landlords and not tenants.”
Economists agree. The Institute for Fiscal Studies has described the current system as “out of date and arbitrary” and ripe for reform.
Reeves has also asked officials to look at changes to stamp duty in England and Northern Ireland. (Wales and Scotland have their own systems.)
In a paper for centre-right think-tank Onward, economist Tim Leunig last year tabled proposals to scrap council tax and stamp duty. Homeowners — and not tenants — would pay a proportional tax towards local services on house values below £500,000, alongside a national levy on the value above.
What are the pros and cons of the potential changes?
A tax targeted at higher-value properties could be introduced relatively quickly, and could help address calls among Labour backbenchers for the wealthy to contribute more.
While Conservative chancellors looked at some sort of “mansion tax”, they ended up backing away because the extra revenue did not justify the political cost.
But that calculus may have changed with Labour in power, with ministers stressing the need for fairness in the Autumn Budget — code for richer taxpayers paying more.
Increasing rates of council tax by 50 per cent on the highest-value properties would, for example, bring in close to £3.5bn, according to the IFS.
Any changes would still carry risks. Applying CGT to higher-value homes could prove particularly hazardous, said Tom Bill, head of UK residential research at Knight Frank.
“Based on the last decade, I’d be surprised if there was anything to tax at the top end of the property market given that prices in prime central London are down 20 per cent over that time,” he said.
“A tax that reduced demand further would therefore also affect the prospect of future gains and could be self-defeating.”
Deeper reforms to council tax and stamp duty would potentially take years to introduce and enact, and could entail hefty transitional costs.
Carsten Jung, economist at the Institute for Public Policy Research think-tank, said replacing the levies was “the right thing to do” because of the unfairness of the existing system.
“But it would be a major project and it would also entail some big decisions on local council finances, including on how to pay for reform of social care. It is probably not something that could done in the few months leading up to the Budget,” he said.
Additional reporting by Julie Steinberg
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