Reeves’ Budget Should Scare London Homeowners

Britain's regressive and arbitrary system of local property taxation is in need of a root-and-branch overhaul — and has been for decades. A swirl of speculation and background briefings has left little doubt that taxes on the most expensive homes will be increased in this month's budget. What's now under discussion looks more like a sticking plaster, though. Political pragmatism and fiscal pressures mean that's no surprise. It's still a missed opportunity.

Chancellor of the Exchequer Rachel Reeves sees new, higher bands of council tax as the best way to raise several billion pounds to help shore up Britain's public finances, the Financial Times reported at the weekend, citing people briefed on her thinking. Homes are currently grouped in bands from A to H based on valuations that were last updated in 1991. A targeted approach appears more likely than a full revaluation, the newspaper said, referencing a proposal by the Institute for Fiscal Studies to double levies on properties in the two highest existing bands, G and H, that could raise £4.2 billion ($5.5 billion).

Listen for the wails of southeast England's moderately wealthy homeowners if this is the plan that's adopted. The overwhelming majority of Band G and H properties are in London and the southeast, accounting for about 600,000 properties. So these owners will shoulder most of the burden if tax rates on this segment are doubled. Band H is the realm of the solidly affluent — this includes properties valued at more than £320,000 in 1991, which would translate to at least £1.5 million now (and more in London, where values have climbed more than sixfold in the past three decades). But Band G reaches into a much more ordinary population.

A quick perusal of nearby homes for sale on Rightmove in this columnist's outer London borough throws up several unremarkable-looking Band G properties on offer for around £900,000. By contrast, one semi-detached house advertised as being in Band D — three rungs below — is on the market for £1.075 million. This is a taste of the anomalies and random thresholds that a 34-year-old unreformed system can throw up. Houses can be substantially improved or extended — even demolished and rebuilt — without moving council tax bands.

There clearly isn't much to choose between homes at the bottom end of Band G and the grades directly below. Doubling the tax on Band G while leaving lower levels untouched would simply substitute one set of arbitrary and unfair results for another. These homeowners are likely to be relatively well off but not substantially different from their Band F and E cohorts — mostly salary-earning families with mortgages and children.

They would face a double hit. The annual Band G council tax charge in Barnet, for example, is £3,393. Paying that much again would be a meaningful change on its own, but there's also the effect on market prices to consider. Capitalize that ongoing liability at a rate of 4% and the implied decline in value is about £80,000 — a far from trivial impact for a property that may have cost around £1 million. Recent buyers may feel they have already paid for the privilege of living in a higher-value property via stamp duty, a transaction levy that steps up proportionally for more expensive purchases (the bill for a £1 million house would be close to £50,000).

Doubling rates on the top bands hails from the same theoretical stable as the "mansion tax," which helped to scupper then-Labour leader Ed Miliband's chances of becoming prime minister in 2015. The idea (which has been floated again in the runup to this budget) is intuitively appealing: Impose an annual levy of, say, 1% on the value exceeding £2 million of the most expensive properties — taking modest amounts from those who can clearly afford it. The proposal damaged Labour in London and the southeast after Conservative-supporting media painted it as anti-aspiration and speculated that the party would extend the tax down to properties valued at less than £2 million.

This wasn't an unfounded fear. The problem is that there are too few super-expensive properties to raise significant amounts of revenue — as we can see in the council-tax bands proposal. Band H properties account for only 0.6% of homes in England and Wales, and only 1.8% of those in London. The temptation will always be to move down the curve. Tax Policy Associates' Dan Neidle includes a calculator in his analysis of the proposal that helps to illustrate the point: If Band G tax is held steady, then the tax on Band H would need to rise to about seven times its current level to raise the £4.2 billion envisaged.

Splitting the upper echelon into more high-value bands doesn't solve this problem — any more than cutting Yogi Berra's pizza into more slices creates a bigger meal. "Dividing the top band into two is a lot of work for virtually no financial gain, and does not seem a sensible proposition," Tim Leunig, a professor at the London School of Economics and adviser to the former Conservative government, told me. Meanwhile, doubling tax for the top two bands would leave someone living in a £10 million house in Westminster paying less than than the occupant of a £1 million house on the edge of London and was "plain weird," he said.

The Guardian reported in August that the Treasury was studying Leunig's proposal for a proportional property tax that would replace council tax and stamp duty (a levy that's a drag on the economy because it deters people from moving house). In the event, it looks ready to settle for a simple cash grab.

There's no route to reform of UK property taxes that doesn't involve owners of more expensive homes paying more. But this can be done in a more rational, comprehensive and equitable manner. That carries political risk, but then what does a government with record-low popularity have to lose?

Source: Bloomberg