There is a lot wrong with the UK property market. Houses are too expensive for the next generation to buy. Older people are occupying houses that sell for far more than they cost to buy. There is huge unfairness between those families that have houses and can pass on equity to their children, and those who do not own property. The rising price of property sucks money from the rest of the economy. This paper proposes some tax changes which could result in a property market which functions better and makes cheaper housing available.
Currently, the policy to ease the demand for housing is to incentivise more building by granting more planning permissions for new estates on the edge of villages and towns. But developers will never supply the market in such a way that it reduces sales price. They control the pace of release of new builds onto the market in such a way that the rise in house prices drives investment and fat return on capital. In contrast, the proposals below would encourage greater occupancy of existing property to reduce demand for new builds, ultimately lowering house prices.
Easy does it
First, an overall warning: big changes too fast can upset the markets, with dire results for the spending and savings of just about everybody. So, any change proposed below should be gradual, over about ten years. These changes would not destabilise the market in the short term as the rates of change would be trialled in advance and introduced at the rate to which the market responds.
Property taxes skew the market
How property is taxed in the UK skews the market. For private property-owners, rates are charged by the local councils based on housing price valuations last done in the early 1990s, in bands A to F. Business owners have to pay business rates. They are much higher for High Street shops than for those on commercial land out of town, such as supermarket sites. This inability to pay the high business rates is one reason for the increasing closure of small high street shops, and the “death of the high street.”
The value of land should depend not only on the size of the plot but also on nearby facilities and infrastructure. For example, a greenfield site near a motorway junction is a prime spot for commerce, like warehouses or a supermarket, because delivery vans and customers can reach it easily. But such land, a greenfield site classified as agricultural, can be bought up under the current system at cheap agricultural prices by a property developer who then profits enormously if planning permission is secured to convert the site to commercial use. So, for the proposed new system of land taxes, the value would be assessed at the utility value of the site.
In Japan (my wife is Japanese), they have long had land tax because in an earthquake prone territory buildings are not permanent, so they have a deep-rooted appreciation of the value of location rather than temporary structures.
Land Value Tax proposed
Here in the UK, the proposed Land Value Tax (LVT) would be paid monthly to the local authority, replacing rates. It would be paid by the registered property-owner, whether a private person or a business, and would be enforceable in the law courts. The value would be based on the land utility not on whatever is constructed on the site. This value would be revised each year, determined by the average prices of recent sales in that location. This would encourage better use of land in an equitable way and prevent land-banking which is one reason for the current shortage of new housing. The current exemption of rates on empty land or unoccupied property would be removed. Property owners would not want to pay a tax on high-value land that is empty of buildings. In London, this might stop the practice of taking over high-end properties by rich (and anonymous) overseas investors and leaving them unoccupied.
LVT would be much easier to administer than the current system of rates. It is said that about 50% of the rates are spent by councils on tracking down who has to pay them because tenancies and occupants change. Under LVT, only the registered property owner would be liable (though of course they would pass on the expense to their tenants). Foreigners purchasing property in the UK would be required to have a legal office with a UK address by which the monthly LVT can be collected.
Replace section 106
Developers currently have to make extra payments, under Section 106, to the council for planning gains which amounts to a faulty way of capturing this difference between purchase value of the land and the utility value. LVT, based on the utility value as tested in the market by actual sales, would remove the necessity for Section 106. Currently Section 106, which is supposed to result in more affordable housing and better infrastructure in new developments, is often allegedly used for covert deals between local governments and developers, which result in under-delivery of the public benefits. But taxing the value upfront through LVT would do away with this as the Council would be getting the money directly through the tax, enough to pay for the public benefits. The Mayor of Hartlepool recently expressed a desire to pilot such a scheme.
LVT has also long been a Policy discussed in LibDem conferences. Stamp duty which is levied on house purchases should also be recalibrated. Currently it is levied on houses above the value £250,000. The minimum threshold of this should be raised annually across ten years so that in the end only the most expensive properties are subject to stamp tax. The effect of this is to reduce the amount of money that house purchasers need to put forward. This will have the effect of stimulating market activities as growing families can more easily scale up and new entrants can more easily find the money to purchase the cheaper starter houses.
Other taxes
Stamp duty can also be used as a tool to discourage sales for uses that have a high environmental impact, such as those out-of-town shopping centres. Money from taxing these more heavily could be invested in light rail or trams to replace the traffic jams of vehicles trying to access these sites.
Capital Gains Tax on sale of property should be gradually abolished (over ten years) via a rising tax threshold, as this would enable the owners to release their property back into the market more readily, unhindered by fear of this tax which often pushes a property-owner into the next tax bracket.
The same would apply to Inheritance Tax where the threshold could gradually be raised until after ten years it is abolished.
Although these tax cuts might seem to reduce the amount of revenue for HMRC, in fact they are likely to increase revenue. With more predictable money raised through LVT, local governments can deliver more projects of public benefit. This will increase local amenities and infrastructure, thus increasing the value of the land and the LVT take. Increased economic activity also brings in more VAT. Thus, revenue from LVT and VAT would reflect the actual market activity timeframe rather than the current variable collection which reflects the boom and bust of the market. This would introduce greater stability in the market by making costs for developers and restoration projects more predictable across the age of the project.
No exemptions
I propose no exemption from LVT for private schools, charities, public halls or places of worship. All these would have to pay the LVT which might be very low if the land cannot be used for anything else, such as business or residences.
The aim of abolishing all these taxes is to increase the supply of houses on the market, starting with the cheaper properties. It is important that there is no drop in the total money received by councils as they have to maintain the services these pay for. So, this is why carefully scaled timing and calculation of exact rates of LVT applicable locally would be at the say-so of the local council. This means different counties or towns could vary in LVT, depending on incentives they want to offer to investors or developers.
The aim of all these proposals is to remove housing speculation from the UK economy. As a nation, we have a disproportionate amount of our wealth tied up in property rather than in the productive economy. The rising price of housing means that housing benefits rise to match. 98% of the residents in Camden, for example, live in subsidised housing. But, if the supply of housing is increased, the price would become more affordable, and the need for subsidies less. Most of the benefit of housing benefit goes to the property owners in the rising value of their properties. The Government could spend that money instead on subsidising house insulation and heat pumps.
