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Is it time for major reform to how we tax property?

Scotland’s revolution in stamp duty has sparked debate about the archaic property taxation system in the UK and whether it needs wholesale change.

Experts say there are a number of areas ripe for reform beyond stamp duty, such as raising more revenue from property wealth and outdated council tax bands.

First, there is stamp duty. From April, Scotland will massively shift the stamp duty burden on to more expensive homes.

The current system has no charge on properties worth up to £125,000, a 1 per cent charge on the entire value of homes between £125,001 and £250,000, 3 per cent between £250,001 and £500,000, 4 per cent between £500,001 and £1m, 5 per cent between £1m and £2m and 7 per cent over £2m. Scotland is abolishing the slab structure in 2015, so tax will only be levied above thresholds and not on the total amount.

Below £135,000 there will be no tax, between £135,001 and £250,000 buyers will pay 2 per cent and between £250,001 and £1m the rate will be 10 per cent. For properties worth over £1m the rate will be 12 per cent.

The Council of Mortgage Lenders, the Building Societies Association and the vast majority of the housing industry are calling for reform of the slab structure in the rest of the UK.

The Forty Group of Tory MPs says stamp duty should be paid by the seller instead of the buyer as a way of cutting costs for first-time buyers.

Coreco Group director Andrew Montlake says: “The stamp duty system is very outdated, causing bunching around thresholds and distortions to the market. The theory behind the Scottish changes is good and there is no reason why it shouldn’t be done in the rest of the country too.

“My only concern is the strange decision for it to jump up to 10 per cent so quickly, it could be done more gradually. Now Scotland has moved, it puts a bit more pressure on the UK.”

But Treasury insiders say the UK Government is wary of tinkering with stamp duty because it fears there would be a drop in revenue.

The Office for Budget Responsibility puts stamp duty revenue at £6bn for the last year and estimates it will grow to £9bn by 2017/18.

There have been some small changes in recent years, with the coalition Government introducing a new 7 per cent stamp duty band on homes worth more than £2m.

There were also Budget rumours the Treasury wanted a new 2 per cent tax band on homes worth up to £300,000 but wholesale reform in England and Wales remains off the table.

GPS Economics director Gary Styles says the Treasury should consider a variable stamp duty system as a way of exerting more control over a boom and bust housing market.

He says: “Stamp duty is a very effective way of raising money because as house prices rise, then revenues rise. It has that natural tendency.

“If you want to constrain the market, which has been the Bank of England’s concern, then the more sensible approach is variable rates of property tax. When we come to the downturn, you could cut the rate to stop making it worse. We need a system that can be varied year by year.

“What we really want to do with property tax is control the cycle as well as raise revenue.”

Secondly, there are wealth taxes. There are three reasons to tax property wealth; it cuts the deficit, it is hard to avoid and it taxes massive asset growth.

The LibDems want to introduce two new council tax bands on expensive homes while Labour is calling for a 1 per cent annual charge on homes worth more than £2m.

Centre for Economics and Business Research head of macro-economics Scott Corfe says: “Whoever wins the next election needs to deal with a huge deficit. It will be partly addressed through spending cuts but there will also be tax changes. Some parties are exploring property taxes such as the mansion tax.

“Although Labour talks about bring back the 50p rate, there are questions over whether it would raise much money because people on high incomes are more mobile and could leave the country. It is easier to get someone with a mansion tax as you can’t get out of the situation easily.”

The Nationwide House Price Index shows the average house price has grown from £4,378 in Q1 1970 to £188,810 in Q3 2014, a 430 per cent increase.

Stamp duty

The LibDems have long argued for a shift on taxing income to taxing this “unearned” wealth. But there are problems with annual tax charges as they force people to cough up cash.

Treasury select committee member and Conservative MP Mark Garnier says: “We now have a mind-numbing amount of wealth tied up in property and it is not being put to good use. If we did tax property more by value, then it would cut prices in the property market and you would smooth out regional discrepancies.

“But the other side of the coin, which is my view, is that if you put up council tax bands or a mansion tax, then you are taxing illiquid assets. The thing that troubles me with taxing property on an annual basis is that you need much more liquid and disposable income to actually buy a property.”

The Tories have resisted LibDem attempts to push for a mansion tax within Government. Chancellor George Osborne has previously said people should not be “clobbered with a mansion tax”.

Despite the resistance, there are also influential thinkers within the Conservative party who want to see a tax on property wealth.

Whether it is stamp duty or property wealth the calls for reform are growing louder and Scotland’s reforms pile the pressure on the rest of the UK to act.


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. I can make a case for the Stamp Duty reform as you have to have either a decent income and/or a lot of cash to buy at those levels.
    Higher annual taxes on more expensive properties is a very different problem. A lot of these properties are occupied by retired people with limited income–if you are stupid like the Liberal Democrats this doesn’t seem to matter. For normal human beings if you cause this sector of the population severe financial hardship because of their past earning capability you are going to depart from one of the fundamental tenets of taxation i.e. that each individual should not be taxed beyond their ability to pay

  2. I do hope that we do not move to punitive annual property taxation. Whilst there are undoubtedly discrepancies in council tax bands the answer is not to suddenly start massively increasing taxation on high value properties. This could mean that people who happen to have bought their house in an area which has experienced exponential house price growth over the long term(most of London) would now have to sell their property as their incomes are insufficient to meet any proposed recurring property wealth tax. And furthermore they would not be able to find anyone to buy the property from them at a reasonable price as the new purchaser would also suffer the same tax. Whilst tax reform may be needed the answer is not to introduce ill conceived regressive tax measures which end up distorting markets in this way.

  3. Am I the only one who thinks if someone is “forced” to sell a £2m plus property that they bought many years ago due to being unable to pay the cost it is not the end of the world. They would still be able to purchase a little cheaper property in a similar area. They would still have more in funds than 99% of the UK population. They have no god given right to advantageous tax arrangements and the majority of the population have no sympathy whatsoever. Those in this situation in the majority have gained not through striving and creating wealth but through remaining in a property for a period of time.

    That said I would be a little concerned that it would be the thin end of the wedge. A future government might think say £250k properties are for the wealthy and start to tax them more heavily.

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