Calls are growing for Andy Burnham to commit to a tax shake-up which, backers claim, could save 18 million households an average of more than £550 a year. The current council tax system is seen as deeply flawed, and can mean someone living in a £150,000 terraced house in Middlesbrough pays the same as the wealthy owner of a £250 million home in London’s Westminster. PM-in-waiting Burnham said last month he was “personally keen to see reform of council tax.”
What is council tax?
Council tax replaced the hated poll tax—officially the Community Charge—introduced by the Tories in 1990 in England (a year earlier in Scotland), which itself replaced the old domestic rates system. After a massive backlash that contributed to Tory leader Margaret Thatcher’s resignation, council tax was brought in instead. It saw all properties split into eight bands (A to H) based on how much they were worth in 1991, and it has remained the same since. Council tax is an annual fee you pay to your local council, which sets the amount for each band, and goes towards funding local services such as rubbish collection and libraries. It brings in £35 billion a year but not nearly enough to meet local authorities’ funding needs.
What is stamp duty?
Stamp duty is a tax usually paid when buying a property or a piece of land. It applies to residential properties in England and Northern Ireland costing more than £125,000, unless you are a first-time buyer, where it is £300,000. For all other buyers, it is then 2% on purchases from £125,000 to £250,000, and increases in price blocks above that. Scotland and Wales operate similar systems. Stamp duty is a big money spinner for the Treasury, raking in more than £18 billion a year. However, critics say it is a big drag on the housing market, adding thousands of pounds to the cost of buying a home.
Why is council tax seen as unfair by some?
Critics say the system is long overdue for reform given dramatic regional differences in property prices. Official estimates suggest the average home in London is now worth more than six times what it was in 1995, compared with barely three times in the North East. Due to limited number of bands, it has led to a ludicrous situation where people living in vastly more valuable homes pay the same—or even less—than others in properties worth a fraction. For example, an ultra-luxury apartment in Westminster on the market for a staggering £14 million is liable for Band H council tax of £2,096. Yet that is less than a three-bed semi-detached house for sale in Darlington for £245,000 in Band C and paying £2,250 a year. Put another way, the tax on the Darlington property is 0.92% of how much it is worth, compared with just 0.015% for the Westminster flat.
Bishops Avenue in North London has been famously dubbed “Billionaires’ Row” given it is home to the super-rich. It is one of the wealthiest residential streets in the world. Currently for sale is a £35 million seven-bed mansion, complete with indoor swimming pool, sauna, steam room, lift and staff quarters. The combined Barnet Council Greater London Authority bill for the property is £4,265. In Bishops Auckland, County Durham, meanwhile, a three-bed terrace on the market for just £45,000 is still liable for council tax of £1,766. The tax on the terraced home is 4% compared with a minuscule 0.012% on the Bishops Avenue mega-home.
What is the alternative being suggested?
Fairer Share is among those arguing for council tax and stamp duty to be scrapped and replaced with what is known as a proportional property tax set at 0.48% of a property’s value, or 0.96% for second homes, empty properties and those owned by foreign buyers. Supporters say technology allows for a real-time assessment of property values, similar to those used by websites such as Zoopla and Rightmove. They are, however, based on asking prices, which may be different from what the property is actually worth if sold. As the tax would be paid by owners, that would mean landlords rather than tenants. That said, there is a risk landlords will just pass it on through higher rents.
Would I pay more or less?
While supporters claim three quarters of homes would pay less, that means one in four will be stung with a tax hike. Given how much prices differ, the hit would be mostly concentrated on millions of home owners in London and the South East. Aware of the backlash, supporters propose capping any annual increase at £1,200, still a big shock for many. The cap would, however, be removed when the home is next sold, meaning a potentially whopping tax bill going forward for the new owner. In another nod to concerns among those who are “asset rich, cash poor”, there would be the option to defer the increase until the property is sold, when it would all need to be paid. The Fairer Share website has an online tool to work out how you might be impacted.
What is the impact on council coffers?
The current system has banding charges that are not vastly different by council. However, basing it on a percentage of property values risks meaning windfalls for already rich areas, and poorer areas suffering a slump. To tackle this, supporters say central government would redistribute tax revenues so councils in lower-value areas are not left worse off, while still giving local authorities a stable funding base. The shake-up, claim supporters, would be revenue-neutral, meaning it would not result in any loss of taxes. But setting the proportional property tax higher could rake in more tax though mean more losers in terms of paying more.
Andrew Dixon, founder of Fairer Share, which is calling for the abolition of council tax and stamp duty, said: “Families in ordinary homes in towns across the country are often paying 10, twenty or even sixty times more as a share of their property value than owners of multi-million-pound homes in London. This is not a glitch. It is the inevitable result of a tax still based on 1991 property values, crude bands and a top band that stops at values completely detached from today’s housing market.”
