Blog Post

Reform property taxes to benefit capital and country

Since London’s population began to recover in the 1990s, politicians have struggled to provide the housing and infrastructure that the city needs.

Housing undersupply and the value of residential property as an investment have contributed to rising prices and a squeeze on living standards. And since the financial crash, housing costs and wages have diverged dramatically. While median wages have risen by 10 per cent, rents have increased by 30 per cent, and house prices by a massive 75 per cent.

One fundamental issue for London’s housing market is the tax system. The Mayor of London and London boroughs have very limited power over taxation compared to other capital cities. London is unable to levy new taxes to fund the infrastructure it needs to grow, or systematically to capture the uplift in land values created by public investment in transport or local amenities.

The two main residential property taxes, council tax and stamp duty land tax (SDLT), are outdated, regressive and perverse. Council tax is based on 1991 property valuations (prices have shifted dramatically and divergently since), and taxes expensive property very lightly, adding to its attraction as an investment. And SDLT glues up the system by making transactions more expensive (and thereby discouraging more efficient use of London’s existing housing stock).

Devolution and reform of these taxes, as recommended by the London Finance Commission, would help London to respond to changing economic and social needs. This would also help the rest of the UK; by supporting income and corporation tax growth in London, property tax devolution would support the UK economy as a whole.

At the very least council tax should be revalued and reformed, to bring values up to date, and to allow more variation between tax levels for the cheapest and most expensive property. Wales has introduced modest changes in this area, with a 2003 revaluation and an additional band for the most expensive properties. We could go a step further, and replace council tax with a property value tax, based on a set percentage of a home’s value. Centre for London modelling suggested that an annual rate of around 0.27 per cent would match existing revenues, but shift the burden of tax from cheaper to more expensive properties.

A more radical approach would be to introduce a land value tax, which would tax the land that a property occupies. The tax would be hard to evade, would target the high land values that make London’s housing so expensive, and by taxing empty or underused sites would encourage more efficient land use in a city where development sites are scarce. The tax would be politically risky, but work on land value capture by Transport for London underlines the extent to which private landowners can benefit from unearned value increases as the result of public investment in infrastructure.

London is not accountable for the majority of taxes that are levied on its residents and businesses for the public services they receive, and by the same token, it cannot propose different or better ways of raising those taxes. With the capital’s population growth continuing, the spending review offers government the chance to look seriously at devolving property taxes to London government. Allowing London to experiment with reforms, would enable the capital to better meet its own infrastructure needs and address its own affordability crisis, while continuing to generate a fiscal surplus to support the rest of the UK.


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Blog: Is the devolution debate stuck?

Richard Brown is Research Director at Centre for London. Follow him on Twitter.