Lucian Cook is Director of Residential Research at Savills and author of ‘Taxing Mansions’ for the CPS.
Over the course of 2012, the taxation of high value residential property has been at the forefront of the political agenda.
Top end property already makes a vastly disproportionate contribution to receipts from both stamp duty land tax (the primary transactional tax) and inheritance tax (the primary wealth tax). As a result, the UK already has by far the highest property tax take of all OECD countries (equivalent to 4.2% of GDP, compared to the OECD average of 1.8%).
It is also these properties which make the greatest contribution to the high tax take. In 2010 properties worth over £1 million accounted for just 1.6% of recorded sales but 26% of residential stamp duty land tax receipts - some £1.2bn. On top of that, in 2009-10 0.7% of the housing stock held at death (with an average value of £1.13m) generated 36% of the inheritance tax receipts from residential property; some £831million.
Yet in some political circles there remains a call for an increase in the annual tax levied on high value housing, either through the introduction of a mansion tax or, as has been discussed more recently, the introduction of new council tax bands at the top end of the market.
Proponents of such measures ignore the overall tax contribution of such property and continue to argue that high value homes make a low contribution to local government tax. In reality, properties in the highest council tax band account for just 0.6% of the housing stock in England and contribute approximately £320 million in council tax receipts with an average council tax bill twice the national average.
Initially this begs a question: why do we need new council tax bands, when the top band already pays so much, and when the numbers represent such a small proportion of the nation’s dwellings?
Furthermore the administrative costs of re-valuing the 130,000 properties in the top tax band could be significant – assuming of course this were a revenue raising measure, rather than redistributing the current council tax liability.
Additionally removing the cap on the higher rate Council Tax bands will affect many of those asset-rich, income-poor households which have seen the value of their properties rise over recent decades – potentially forcing people out of their homes.
Finally, if the rationale behind introducing new Council Tax bands is to raise more money in order to reduce the deficit, then all those who are in favour of localism should be concerned. Council tax revenues are intended to pay for local services. If new bands are to be introduced as a revenue raising measure; then there is a real risk that the distinctions between central and local government will be blurred, flying in the face of local accountability for the cost of local government.*
Council tax is not perfect. But it is simple and widely understood. If reforms are to be made, then they should be implemented in such a way that takes account of the already large contribution made by high value residential property.
Recent increases in stamp duty for high value property and anti-avoidance provisions already under consultation will increase the already disproportionate tax burden on high value homes. Further increases from other taxes would be inefficient, make little economic sense and risk alienating the owners of prime residential real estate whom we rely on for significant economic activity.
* Currently each local authority currently sets council tax charges with regard to their specific financial needs. It then distributes the total requirement by reference to the make up of the housing stock within that local authority. This means that the amount of council tax payable for properties in the same council tax band varies across the country.