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

TThe UK estate tax system is inefficient and unfair. There is a consensus among all political parties that something must be done. In terms of efficiency, stamp duty is the main culprit: like a lump sum tax on property wealth paid at the point of purchase, it discourages people from moving as frequently as they should. It prevents people from achieving their full economic potential by finding the right job, in the right area, or moving to a home appropriate for their family size.

Along with rising interest rates and slowing growth, taxes contribute to the decline of property transactions in the UK near record lows. Meanwhile, more than a third of English households live in houses specified by the government As ‘unoccupied’, with two or more spare bedrooms; 90% of them are homeowners. Stamp duty reform to free up some of this unoccupied property – mainly concentrated among baby boomers who are now reaching retirement age – could boost growth and productivity, and perhaps even an affordability crisis.

I say “likely” because reductions in property taxes are well established Increased demand for home ownership -And therefore house prices.

Clearly oblivious to this fact, the Conservative and Reform parties have proposed significant reductions in the overall burden of property taxes. Kemi Badenoch has promised to scrap stamp duty on primary homes. The UK Reform Authority proposed smaller cuts to stamp duty but added cuts to inheritance tax and the restoration of some landlord tax breaks.

These policies will Increased demand for housing As a financial asset, and therefore prices. Such reforms would most benefit those living in London and the south-east who have the most expensive homes, and those who tend to move more frequently, while higher prices would largely negate the benefits for first-time buyers, just as Help with purchasing subsidies I did it under the Conservatives. Higher prices will also weaken incentives for owners of empty factories to downsize.

In terms of fairness, council tax has essentially become a wealth tax on low and middle income earners. It is a tax based partly on public services provided locally and partly on property value, and is ‘band-based’, with those living in higher bands paying more. These bands were introduced in 1991, and politicians have chosen never to reassess them since, despite house prices in certain areas of the country rising seven-fold. As a result, families in the bottom 10% of property values ​​pay, On average more than 0.7% of their property value annually, while those in the top 10% pay less than 0.1%. A multi-million pound mansion in Westminster can incur less tax than a modest house in the north of England.

The property tax system also favors homeowners over renters and investing in real estate at the expense of other financial assets. Few people know this, but until 1963 there was a tax imposed on homeowners based on the rent they would have paid if they had rented their homes: the so-called assumed rent, a tax that is still imposed in Switzerland and the Netherlands. More importantly, given the dramatic rise in home prices since the 1980s, homeowners enjoy a 100% capital gains tax exemption on the sale of their primary residence. in £31.5 billion in 2023-24This was the largest single tax break in the country, equivalent to 1.15% of GDP, roughly equivalent to the administration of the Home Office and the Ministry of Justice combined.

All these disadvantages combine to Investment payment Lending in the UK is towards property, rather than capital investment or equity in companies. This is a major but largely neglected reason Productivity and growth levels stagnate in the UK As well as the affordability crisis.

Effective estate tax reform requires an approach that suppresses investment demand and housing over-consumption in the UK and frees up stock for those who really need it. Among economists on the left and right, there is a growing consensus that the UK needs a “big bang” rather than piecemeal reform. Replace stamp duty and council tax reform with an annual tax Relative property tax (PPT) of about 0.5% on the market value of the dwelling – or the value of the land beneath it – would address the challenges of inefficiency and injustice within the current system. The research he conducted Fair participation campaign It shows that this would benefit three-quarters of the population, not least the “red wall” seats that Labor is burning for reform.

Complexities arise because council tax is also a vital source of funding for local public services; Poor areas may end up needing huge transfers from the central government, which would lead to greater fiscal centralization. A Last suggestion Former government adviser Tim Leunig called on councils to control money from PPT on homes worth under £500,000, setting their own rate and a minimum payment of £800, while central government would take money from properties above that value at a rate of 0.5%, with a rate of 0.8% for homes over £1m.

Rumors spread that the Treasury was seriously considering this scheme. The political risks will be high since the media is mostly hostile to any new property tax. Labor must be bold and make the positive case to shift the burden of taxation off working people. Radical reform of property taxes could help achieve three of its main policy goals: reducing rising wealth and regional inequality, resolving the housing crisis, and stimulating economic growth.