Expert Comment: A property wealth tax is now politically feasible

Professor John Muellbauer. Credit: John Cairn

High prices of houses and land have distorted the British economy, and impeded productivity growth, creating widening inequality and despair for younger generations. The time has come to begin to address this problem. For years it was thought that the influence of property owners made reform politically infeasible.

However, economic and political circumstances have changed.

The government urgently needs to announce revenue-raising measures in the Autumn Budget. There is a widespread perception that too many ‘hard decisions’ of the last year have been borne by the vulnerable and less privileged.

Proposals such as a 2% tax on total wealth over £10mn are now headline news, reflecting a greater appetite to redistribute the tax burden onto broader shoulders.

I propose a two-part solution to the fairer taxation of property, to encompass a reform of the most expensive Council Tax bands, and a land value tax on the most expensive land (including unoccupied land).

First, I propose replacing Council Tax in the top two bands, covering around 1.14mn properties in England and Wales, by an annual wealth tax of 0.5% of property value for UK taxpayers (and with a simple deferral scheme to protect cash-poor but asset-rich pensioners).

For non-UK owners, and owners of second homes in the top two bands, I propose a tax rate of 1%, lower than typical US property tax rates. Financial assets, paintings and yachts are mobile, while fixed property and land are immobile, even though their ownership may change, making their taxation more effective. To minimise the political push-back, a precise targeting of the tax is required, leaving property taxes for most voters unchanged. This part of my two-pronged proposal could raise as much as £9bn. 

The dysfunction of UK housing taxes: Council Tax is unfair and Stamp Duty damages the economy

Council Tax, hurriedly put together after Mrs. Thatcher’s failed attempt to impose the Poll Tax, is based on 1991 valuations, grouped into 8 price bands and paid by tenants. It is probably the most unfair property tax in the world.

Council Tax, hurriedly put together after Mrs. Thatcher’s failed attempt to impose the Poll Tax, is based on 1991 valuations, grouped into eight price bands and paid by tenants. It is probably the most unfair property tax in the world. 

Tony Blair’s New Labour, elected in 1997, missed the opportunity for a revaluation and reform. In the subsequent decade, house prices soared, especially in the South, making revaluation look more and more politically uncomfortable. Within each local authority, the poorest homes pay the highest tax as a percentage of their property value, while the richest pay the least.

Not only is this locally unfair, but the tax is also regionally regressive. The 2025-6 tax rate for a home in the top band (H) is  around £5100 in Gateshead and Nottingham, but only around £2000 in Wandsworth and Westminster. Because it is undergoing renovation, Forbes House in Belgravia, reputedly worth around £300mn, escapes even this low rate.

Unfortunately, governments are nervous of wholescale reforms that affect broad swathes of voters - even if there are many more winners than losers.

This explains why Stamp Duty Land Tax (at marginal rates up to 12% and now  17% on second homes), affecting small numbers of owners each year, has been maintained, despite the damage to job mobility and economic efficiency. Losers shout louder than winners and may have more clout because of their wealth. A broad revaluation or reform proposal generates uncertainty and therefore resistance. But confining property revaluation and tax reform to the top two Council Tax bands limits both the costs of revaluation and the political push-back.

Unfortunately, governments are nervous of wholescale reforms that affect broad swathes of voters - even if there are many more winners than losers.

My proposal faces fewer obstacles to acceptance than the 2012-15 Mansion Tax proposal for properties worth over £2mn. Far fewer properties need to be revalued under my proposal. Moreover, the Automated Mass Valuation model based on transactions data from the Land Registry (currently being applied in Wales by the Valuation Office Agency (VOA)) now offers considerably lower costs and greater speed of valuation per property. 

Solving the problem of the cash-poor and property rich

Crucial to any property tax reform is a simple deferral scheme to protect the cash-poor but asset-rich owners.

I propose that pensioners can opt to defer payment but with a 0.6% tax rate instead of the 0.5% for cash payers. For every year of deferral, the tax authority’s equity stake in the property would rise by 0.6%. When the property was eventually sold or transferred, payment would become due.

This avoids complex interest rate accrual and uncertainty on deferred payments. Hence, after 10 years of deferral, 6% of the value realised would be paid in tax. To avoid disincentives for those investing in low carbon-emitting homes, discounts should be available based on a home’s Energy Performance Certificate.

This new property wealth tax would replace Council Tax for the top two bands and the revenue in excess of what Council Tax would have raised would accrue to the central government. This ensures that no local authority loses from the reform. Tax collection on owners rather than on tenants would be managed by HMRC, not by local authorities.

Reform Stamp Duty Land Tax at the same time

To stabilise the transition, and for long-term efficiency, the higher rates of Stamp Duty Land Tax for properties in Council Tax bands G and H would need to fall sharply, perhaps to 5%.

As transactions rise, this source of revenue could even increase, benefitting both owners and the Treasury, though moderate falls are a possibility.

By thus improving job mobility for high earners, future employment and income tax revenue would be boosted. There would be a permanent shift in developers’ incentives, away from top-end luxury housing. Together with lower local land prices in high value areas, this should improve housing affordability more widely, especially for young families.  

Serious consideration must also be given to the proposal, for example, from Lucian Cook of Savills, that recent purchasers who paid higher rates of Stamp Duty than the new rate should be given credits against future liabilities under the annual property wealth tax. However, replacing a highly progressive Stamp Duty regime with a much less progressive one combined with an annual property wealth tax that is proportional, rather than progressive, risks reducing the long-run tax take from the wealthiest part of the property sector.

To avoid that outcome, a progressive element, e.g. a higher marginal rate for the annual property wealth tax on properties valued at over £3mn would be required alongside SDLT credits.

There are likely to be moderate falls in the top-end property prices, especially in London and parts of the South East. Once prices have stabilised, there will be several benefits.

Fewer expensive properties bought by foreign investors to park money will be left empty for long periods, increasing effective housing supply. With expensive properties lower in price and lower rates of Stamp Duty, high earners - the ‘strivers’ the government wants to encourage – could more easily afford the deposit needed for a mortgage.

By thus improving job mobility for high earners, future employment and income tax revenue would be boosted. There would be a permanent shift in developers’ incentives, away from top-end luxury housing. Together with lower local land prices in high value areas, this should improve housing affordability more widely, especially for young families.  

Together, these reforms would significantly relax budget constraints on the government, including on high priority infrastructure and social home building programmes. They would encourage a shift of resources away from rent-seeking and land speculation towards investment in more productive activities and assets.

A tax on high value non-residential land

Turning to the second prong of my proposal, I propose a land value tax, on the value of farm and forest land, and all unoccupied land such as land scheduled for development, at 1% on the excess of value above £40,000 per hectare. It is difficult to assess what this would raise, but at least £5bn pa, and probably more.

Economists have long considered land value taxes as the least distortionary form of taxation.

Since Mrs. Thatcher’s government, tax-advantaged farmland has become an investment vehicle for international investors as well as British elites. With low interest rates since the global financial crisis, already high prices have risen further, most of all in locations with ‘hope value’ of being granted future planning permissions.

The great mass of farmland in the UK would be exempt under my proposal, and would not even need valuation. For transparency in establishing land values, including ‘hope value’, options on land would need to be registered at the Land Registry, as the Lyons Housing Review recommended in 2014. 

A tax on current market values of land in expensive locations would have widespread benefits.

It would lower prices of farmland potentially relevant for development, especially for new towns, and by introducing holding costs on undeveloped land, would incentivise development or the sale of land to public agencies assembling land for future development.

The fact that the great majority of homeowners and farmers would be untouched by these proposed reforms helps their political acceptability.

This would facilitate land value capture so that much more of the value gains from planning consents and publicly funded infrastructure accrue to society rather than to wealthy land owners. Land value capture is crucial to supporting the government’s plans for affordable housing.

The fact that the great majority of homeowners and farmers would be untouched by these proposed reforms helps their political acceptability.

Together, these reforms would significantly relax budget constraints on the government, including on high priority infrastructure and social home building programmes. They would encourage a shift of resources away from rent-seeking and land speculation towards investment in more productive activities and assets.

A summary of these arguments appeared in a Financial Times opinion piece on 31 August. For further background, this Q&A addresses many of the most common questions raised by the Council Tax reform proposal, and this working paper explains the estimated revenue gains.