Reeves’ rumoured property levy could add up to merely yet another tax on younger people | Conservative Home

There is an interesting journalistic technique which is to place in close proximity to each other two facts or arguments which address related issues, and which the reader might assume to be connected, and then do nothing to dispel that illusion if it isn’t true. It seems to happen quite a lot in pieces about housing.

Last year I wrote a piece for CapX about one standout example of the form. The first six paragraphs of this Guardian piece talk about a sharp reduction in private-rented housing ahead of the passage of what was then the Renters’ Reform Bill causing uncertainty for tenants and, indeed, making people homeless; the rest of it is lambasting the delay and various quotes from campaign groups calling for an even tougher bill.

Any reader not intimately familiar with the economics of housing could be forgiven for thinking that passing the bill would solve the problem described in the headline (‘Landlords selling up leaving 2,000 households a month in England facing homelessness’), rather than it being the very prospect of the bill causing the problem in the first place.

It looks as if we might have another example in today’s Times. Today’s topic is a rumour that Rachel Reeves might be planning to scrap stamp duty (and possibly also council tax) and replace it with a house value tax, apparently inspired by a proposal from Onward:

“There are no firm details to the proposal, but it was reported that the Treasury was looking at suggestions from the centre-right think tank Onward, which would involve homeowners with properties worth more than £500,000 paying a 0.54 per cent annual tax on any value above £500,000.” 

Furthermore:

“Any home worth more than £1 million would pay 0.81 per cent on the portion of its value over that threshold.”

So far, so fine. I dislike property taxation of this sort conceptually, and so will many other conservatives. But I dislike our current tax mix (grossly over-skewed towards working-age people and incomes) even more – and I did actually once make the case for one myself, albeit mostly as a stick with which to bludgeon people into voting for planning reform instead. But then we get to this bit:

“Onward’s proposals were that the new tax would not be applied retrospectively but would be paid by anyone who bought a home after it was introduced. The 5 per cent stamp duty surcharge for additional homes would remain and those owners would not pay annual levies.”

Can you detect the problem yet? If not, let’s skip a little further down to our present-but-not-involved argument:

“Some 85 per cent of homeowners in England and Wales were “under-occupiers” with one or more spare bedrooms, according to a survey of more than 4,300 by Barclays. Of those, 73 per cent were over 45, and 37 per cent were over 65. The proportion of homebuyers who were 45 or older has fallen from 45 per cent in the 2015-16 tax year to 39 per cent in 2023-24, according to the estate agency Savills.”

The presence of this is justified by the claim that abolishing stamp duty would encourage people to downsize. It is certainly true that abolishing or setting a high minimum threshold for stamp duty would help un-gum the market, to an extent; it has been a drag on moving since George Osborne turned it into a revenue measure.

But doing that doesn’t require a new value tax. It simply requires changing or abolishing stamp duty. The value tax itself isn’t going to do anything to under-occupiers, so-called, because it isn’t retroactive. (In fact, it could have itself a counter-productive effect in those parts of the country where the housing market is most acute, because anyone who sold up after the new regime was introduced would, unless their new home was worth less than £500,000, be trading a value-tax-exempt home for a taxed one.)

So what we end up with is a tax which falls not at all on those who have already reached the top of the housing ladder, but entirely on those currently climbing it (average age of a first-time buyer: 32) or who wish to climb it in future. It will also fall most heavily on places where housing is most expensive, such as London, where the average cost of a first-time purchase is now north of £500,000. (I say expensive, as opposed to valuable, because again: all existing housing wealth would be grandfathered in.)

One bit of good news is that Tim Leunig, the author of the original A Fairer Property Tax report, has at least remembered that inflation exists and thus to index-link the original £500,000 threshold; in his joint proposal this doubles as an index-link for local taxation levels, which would probably be unpopular but is more sensible than having council tax bands based on valuations from 1991.

This puts him ahead of whoever designed the Lifetime ISA, the thresholds of which were fixed in 2016; it has since lost more than a quarter of its buying power and become basically a bear-trap for young savers. (Seriously, the current design of that policy is evil and the Conservatives’ repeated failure to fix it indefensible.)

Yet there are some longer-term dangers we should note. The one merit of stamp duty, as a form of capital gains tax, is that it is a tax on realised gains; i.e. you only pay it when you sell, and you pay it proportionately to what you actually make in the sale. A house value tax, on the other hand, is a tax on unrealised gains: i.e. on what you would make, in theory, if you sold it. That is, generally, a bad idea.

There are mitigating circumstances in this case, namely that a) the percentage rate is (at least initially) very low and b) the asset in question, primary residences, is exempt from actual capital gains tax. Leunig’s proposals also avoid another obvious pitfall – disincentivising improvements which would increase value – by proposing simply that the levy “would rise annually by inflation”, rather than by any updated assessment on a home’s value, until it was sold.

Yet it does leave open the prospect of people being slowly squeezed for a ‘value tax’ which rises with inflation even if the actual value of their property goes down. That doesn’t currently happen much in England, but there are a few cases (e.g. people who bought shared-ownership properties).

But switching from taxing realised to unrealised gains also turns the housing tax into a general, annual revenue tax – and we all know the only trajectory those are heading in. There is nothing fixing those initial rates of 0.54 and 0.81 per cent, beyond the will of the government of the day. That might be fine if it was a universal property tax, but it could end up being perverse if it ends up being yet another way to raid the incomes of younger generations – as older voters’ homes would be exempt, making it easier to hike – and a policy spun as targeting ‘under-occupiers’ ended up as yet another impediment, amongst many, to working-age people getting the home they want.