A major housing thinktank has called for stamp duty and council tax to be abolished and replaced with a new annual property wealth tax, arguing the current system is worsening London’s housing crisis.
In a new report, Centre for London said replacing transaction-based property taxes with an annual levy linked to housing wealth could encourage older homeowners to downsize, improve the use of existing housing stock and generate additional funding for social housing. The group also argues the reforms could make it easier for renters to save for a deposit by reducing upfront moving costs.
The report highlights growing inequality in housing space across the capital, despite Londoners on average having more living space available than two decades ago. According to the research, households in the top 20% of income brackets have seen the amount of space they own rise by 27% since 2004, compared with just 6% among the bottom 40% of earners.
The thinktank says the imbalance reflects wider structural problems within London’s housing market, where rising property wealth among higher-income households has coincided with increasing affordability pressures, record levels of temporary accommodation and homelessness costs estimated at £5.5m per day.
“By every metric that matters, the housing crisis is at its worst,” said Rob Anderson, the director of research at the Centre for London and co-author of the report.
The paper outlines radical reforms, abolishing stamp duty and council tax and replacing them with a partly devolved annual proportional property tax (PPT) that could pay for 106,000 social and affordable homes over the next decade.
Homeowners with the largest properties in the most expensive areas would pay the most tax under the proposed system.
The proposal to replace stamp duty and council tax with a proportional property tax will, at first glance, be attractive to many property owners and prospective buyers.
The removal of stamp duty in particular is likely to be viewed positively, given its well-documented impact in discouraging movement within the market.
One can see the argument that this may encourage downsizing and release under-occupied homes.
However, as with many reforms of this nature, the headline benefits may not fully reflect how the market is likely to respond in practice, according to Laura Hooke, partner at Morr & Co.
She said: “There is a suggestion within the report that increased space has disproportionately benefited higher-income households.
“Whilst this is statistically evident, it may not necessarily follow that a tax of this nature would rebalance occupation.
“Many buyers – particularly younger first-time buyers – are not prioritising space in any event, instead focusing on location, transport links and affordability of running costs.
“As such, it is unclear that a shift in the tax structure would materially alter these purchasing decisions.
“Much will also depend on whether the proposed tax is capable of replacing the revenue currently generated by both stamp duty and council tax.
The examples given suggest that a significant number of homeowners would benefit from reduced overall costs, particularly during the first ten years of ownership.
Hooke believes whilst this may be appealing at an individual level, it inevitably raises questions as to how any resulting funding shortfall would be addressed, particularly where the proposals are intended to support delivery of additional social housing.
She continued: “From a practical perspective, valuation will be fundamental to the operation of any such system.
“A consistent and regularly updated approach would be required, which is likely to involve both administrative cost and scope for dispute.
“It is not yet clear who would bear responsibility for such valuations or how challenges would be managed, but it is difficult to see this being achieved without introducing further layers of complexity into an already demanding system.
“The structure of the tax itself is also likely to influence behaviour.
“Any stepped or threshold-based system tends to give rise to artificial pricing.
“One would expect to see properties transacted just below key thresholds in order to avoid increased liability.
“Equally, where payment of the tax is capable of being deferred, there is a risk that sale prices may be adjusted to reflect accrued liabilities, which in turn may have a distorting effect on comparables and market stability.”
The proposal to allow deferral for those who are asset-rich but cash-poor will no doubt be welcomed in principle.
However, in practice this is likely to require the registration of charges or restrictions against title, with repayment deferred until sale.
Hooke added: “This introduces an additional layer to the conveyancing process, with practitioners needing to investigate, report on and ultimately redeem such liabilities on completion.
“Mortgage lenders are also likely to take a cautious approach, particularly in relation to the priority of any deferred tax, which may in turn affect lending appetite in certain parts of the market.
“In much the same way as we have seen with previous property reforms, the intention behind the proposals is clear.
“However, the success of any such system will ultimately depend on how it operates on the ground.
“There is a real risk that, rather than simplifying the system, it introduces further uncertainty, behavioural distortion and administrative burden.
“Those working within the sector would, once again, be watching closely to see whether the detail delivers the intended outcome, or whether it creates yet another period of instability whilst the market adjusts.”
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