It’s welcome news for the property industry as speculation around major property tax changes have a habit of causing buyers and sellers to play the game of ‘wait and see’ before going ahead with any moving plans.
Note the wording – ‘no immediate plans.’ The PM has previously expressed support for Fairer Share’s proposal to replace Council Tax and Stamp Duty with a Proportional Property Tax, so it may be something he revisits during his time in office. Under the proposal, homeowners would pay 0.48% of their property’s current value each year. The campaign argues that the current Council Tax system is not fit for purpose, outdated and unfair, and that Stamp Duty is an enormous barrier to moving home for many.
For conveyancers, proposals such as these are more than just about which client pays more tax. Any significant change like this would influence client behaviour, transaction volumes and potentially the complexity of the conveyancing process.
Since it hasn’t been fully ruled out in the future, we wanted to understand the potential impact if this scheme were introduced. We have compared what every region in the country pays currently on average for Council Tax versus how much they would pay for Proportional Property Tax.
Unsurprisingly, Inner London would shoulder the biggest increase, and was, in fact, the only region that would see their tax bill rise. However, individual outcomes would vary greatly depending on property value, as our analysis is based on regional averages. Inner London’s annual Council Tax bill of £2,055.55 would rise to £3,198.53. Outer London, meanwhile, would see little change as Council Tax of £2,422.96 would be replaced by Proportional Property Tax of £2,420.63.
The North East would be the winners. This region’s average annual bill would decrease by £1,125.64, from £2,026.53 to £900.89. The full breakdown is shown in the table below:
Source: TwentyCi/TwentyConvey
A single comparison highlights the issue. Consider two similar two-bedroom terraced homes. The only difference is where they are located – one in Blackpool and one in London. Although the London property is worth around seven times as much, the council tax bills are remarkably similar. In fact, the Blackpool homeowner actually pays more.
This is the disparity that sits at the heart of the Fairer Share argument. Under the current Council Tax system, the value of a property does not necessarily translate into a proportionately higher tax bill.
The proposal appears relatively straightforward on the surface. However, implementing such a reform would inevitably affect the home buying process.
Council Tax is based largely on historical valuations. A Proportional Property Tax would depend on the current market value of every home. Yet this raises questions: How frequently would properties be revalued? Who is responsible for this? What happens if a property value fluctuates wildly between valuations? What about valuation disputes that would inevitably arise?
The government would need to use an AVM to value properties. However, the sheer scale of this task and the broad spread of unique property features mean that there would need to be an army of surveyors ready to step in on disputes and deal with a whole raft of appeals processes, checks and balances. The accuracy of the AVM would be under immense scrutiny. Property values are, to some degree, subjective and the result of supply meeting demand. Will the actual sale price be used as part of the calculation? The administration of such a tax reform could be extremely costly.
More scrutiny around property valuations could potentially impact whether sales ultimately make it over the line. Conveyancers could face even more questions about tax liability from clients.
It’s curious to think how it would work if it were to be implemented. Would buyers and sellers stall until they had greater clarity on how the new system would work? This could result in slower instruction volumes for conveyancers until the new tax is fully embedded. Would we experience the opposite effect that we saw occur when the Stamp Duty holiday ended? With uncertainty in the property market already rife, added pressures would only exacerbate unease in the market.
Would there be a cutoff date by which Stamp Duty is collected? Surely many would stall their sale to avoid paying, and we would likely see chaotic backlogs just as the 2020-2021 Stamp Duty holiday played out. Many just-moved homeowners would be angered that they had paid a high tax bill that they could have avoided, had they just waited a little longer to move. Forestalling would result in many transactions falling off a cliff around the time of implementation, then the conveyancing workload would be through the roof post the date of implementation.
To solve this potential consequence, they would almost certainly have to pause payment of Proportional Property Tax for those who have paid out Stamp Duty, to avoid double taxation. Imagine the political backlash if they didn’t. One nuance outcome could be that we’d see an influx of London buyers who would rather pay the upfront Stamp Duty to avoid the Proportional Property Tax for a period of time.
A possible solution for this scenario is putting in place a Stamp Duty Credit system where anyone who bought a home shortly before the transition would receive a tax credit equal to the Stamp Duty they paid. If this solution was used, buyers wouldn’t be concerned about whether they buy before or after the implementation date and so demand would be less impacted. An alternative solution could be that homeowners continue to pay Council Tax and only trigger Proportional Property Tax payments at the point of the next sale. But this would take decades to phase in fully, so it doesn’t seem practical.
Instructions in higher value regions could be particularly affected. Some buyers may reconsider moving to more expensive areas if they face significantly higher ongoing property tax bills, potentially influencing demand in these markets. For conveyancing firms that rely heavily on local instructions, this could create challenges in areas where property values, and therefore tax liabilities, are highest.
On the other hand, it could cause a flurry of activity, with those in higher-value properties pushed to downsize to avoid the higher tax bills. Also, those who have been trapped in their property because they can’t afford to pay Stamp Duty would suddenly have the means to move. Law firms would be under immense pressure and timescales to complete cases would lengthen. The knock-on effect of this potential increase in supply would then subsequently depress prices.
For decades, homeownership in the UK has long been about building equity and increasing the value of your biggest asset. A Proportional Property Tax could undermine that incentive. As a home’s value rises, so too would its annual tax bill. Homeowners may think twice about renovating or improving their property if doing so results in higher ongoing tax liability. Furthermore, asset-rich, cash-poor homeowners would be hit with higher bills they may be unable to afford.
For conveyancers, replacing Stamp Duty could remove one of the more contentious administrative burdens within the process. Currently, law firms are required to calculate Stamp Duty liabilities, navigate complex reliefs and exemptions, and submit returns on behalf of clients. This responsibility has contributed to concerns around conveyancers being treated as tax advisers despite not being qualified, regulated or insured to provide bespoke tax advice. This could be a welcome change for law firms. However, the complexity would not disappear entirely. Instead, it would shift towards managing issues such as apportioning tax liabilities between buyer and seller, checking for outstanding liabilities and handling disputes around property valuations.
What about the proposals to introduce a Land Value Tax? This is a proposed annual levy that would be based solely on the value of the land itself. The aim of land tax is to ensure land is used as efficiently as possible, to prevent land hoarding. An elderly person occupying a large house would be encouraged to move out to free up space for younger families and a developer who originally proposed ten properties to be built on land but only commissioned one would be encouraged to either build or sell up.
PM Lloyd George's experimented with a land value tax in 1909. It didn’t go down well for landowners or the government. The valuation exercise turned out to be highly challenging and many landowners fought back. Hundreds of surveyors were sent out to check valuations. The tax was then abolished in 1920 and the resulting cost of administering the tax almost certainly exceeded any revenue raised. This is a red flag and potential outcome for both the Land Value Tax and Proportional Property Tax proposals due to the high administrative burden.
Implementation of a Land Value Tax would be difficult, and a big issue would be valuing the land itself. However, arguably this would be easier to value than properties because property valuation is subjective and some homes have quirks and characteristics that make valuation tricky. With a Land Value Tax, this would be avoided.
A Land Value Tax would hit London and the South hard, while the North would benefit from paying significantly less. If land tax was implemented, it would also likely shake up property valuations with some falling and others rising.
For the lettings market, the Land Value Tax would fall on the owner, not the occupier. This could be the final straw for any landlords that remained after the Renters’ Rights Act. Conveyancers could see increased instructions from landlord properties. Alternatively, landlords would just pass the cost onto tenants and rents would soar to cover the costs, an outcome that the lettings market could ill afford.
Council Tax is based on property values from 1991. It’s little wonder that it remains under scrutiny. If a Proportional Property Tax were to be implemented, London residents are likely to be the biggest losers, while many in the North and Midlands would benefit from higher disposable income. Same goes for Land Value Tax.
Execution of such a change could be like walking a minefield and the upset it could cause to the property market may not be worth the end result. There’s also the very real concern that the administrative costs behind these proposals’ costs more than the amount they raise, as was the case for Lloyd George's land tax back in the day.
Whatever the economic merits of a change, as ever, implementing any new regime will be acutely painful for the profession. Nevertheless, calls for reforms are unlikely to disappear anytime soon and the debate is far from over.