Abolishing stamp duty won’t solve Britain’s housing crisis – but this radical property tax just might | Josh Ryan-Collins

6 hours ago 4

The UK’s property tax system is both inefficient and unfair. There is consensus among all political parties that something needs to be done. On the efficiency side, stamp duty is the main culprit: as a lump sum tax on property wealth paid at point of purchase, it discourages people to move as frequently as they should. It prevents people from realising their full economic potential by finding the right job, in the right area, or moving into a home suitable for their household size.

In combination with high interest rates and sluggish growth, tax is contributing to UK property transactions reaching near record lows. Meanwhile, over a third of English households live in homes defined by the government as “under-occupied”, with two or more spare bedrooms; 90% of these are homeowners. Reforming stamp duty to free up some of these under-occupied properties – mainly concentrated in the baby-boomer generation now hitting retirement – could enhance growth, productivity and, potentially, the affordability crisis.

I say “potentially” because it is well established that cuts to property taxes increase the demand for homeownership – and in turn, house prices.

Apparently oblivious to this fact, both the Conservatives and Reform have proposed major cuts to the overall burden of property taxation. Kemi Badenoch has promised to abolish stamp duty on primary residences. Reform UK has proposed smaller reductions in stamp duty but added in cuts to inheritance tax and the restoration of some landlord tax reliefs.

These policies will increase the demand for housing as a financial asset, and thus prices. Such reforms will most benefit those in London and the south-east with the most expensive homes and those who tend to move more often, while higher prices will largely cancel out the benefits for first-time buyers, just as help-to-buy subsidies did under the Conservatives. Rising prices will also weaken the incentives for empty-nesters to downsize.

On the fairness side, council tax has become essentially a wealth tax on low- and middle-income earners. A tax based partly on locally provided public services and partly on property value, it is “band-based”, with those in higher bands paying more. The bands were introduced in 1991 and politicians have opted never to revalue them since then, despite house prices in certain areas of the country increasing sevenfold. As a result, households in the bottom 10% of property values pay, on average, over 0.7% of their property value annually, while those in the top 10% pay less than 0.1%. A multimillion pound mansion in Westminster can incur less tax than a modest home in the north of England.

The property tax system also favours homeowners over renters and investment in property over other financial assets. Few people know it, but until 1963 there was a tax imposed on homeowners based on the rent they would have been paying had they been renting their homes: so called imputed rent, a tax still imposed in Switzerland and the Netherlands. Most importantly, given the explosive rise in house prices since the 1980s, homeowners enjoy 100% relief on capital gains tax on selling their primary residence. At £31.5bn in 2023-24, this was the single largest tax relief in the country, equivalent to 1.15% of GDP, roughly the equivalent to running the Home Office and Ministry of Justice combined.

All of these flaws combine to drive investment and lending in the UK towards property, rather than capital investment or equity in businesses. This is a major but largely neglected reason for the UK’s stagnant productivity and growth levels as well as the affordability crisis.

Effective property tax reform requires an approach that represses investment demand and overconsumption of UK housing and frees up the stock for those who really need it. Among economists of both the left and right, there is increasing consensus that the UK needs a “big bang” rather than incremental reform. Replacing stamp duty and reforming council tax with an annual proportional property tax (PPT) of around 0.5% on the market value of the home – or the value of the land underneath it – would deal with both the inefficiency and unfairness challenges within the existing system. Research by the Fairer Share campaign shows it would benefit three quarters of the population, not least the “red wall” seats that Labour is haemorrhaging to Reform.

Complications arise because council tax is also a vital source of funding for local public services; poorer areas could end up needing huge transfers from central government, resulting in even more fiscal centralisation. A recent proposal by ex-government adviser Tim Leunig argued for councils to control the funds from a PPT on homes under £500,000, setting their own rate and with a minimum payment of £800, while central government would take funds from properties above this value at a 0.5% rate, with a 0.8% rate for homes above £1m.

Rumours circulated that the Treasury was seriously considering the scheme. The political risks would be high given the media is mostly hostile to any new tax on property. Labour needs to be bold and make the positive case for shifting the burden of tax off working people. A radical reform of property taxation could help deliver three of its key policy goals: reducing rising wealth and regional inequalities, solving the housing crisis and stimulating economic growth.