Weak foundations: reforming UK property taxes 

It has been widely reported that the Chancellor is looking at ways to reform the UK’s complex and inefficient property tax system at the Autumn Budget. 

That property taxes are ripe for reform is not a controversial view. Tax experts, economists and politicians across the political spectrum have all called for changes to simplify the rules, remove cliff edges, improve incentives, and tackle perceived unfairness in the current system. 

But successive Chancellors have shied away from more fundamental reform. This reflects two simple facts. First, no matter how damaging the current system is thought to be, property taxes raise a vital £70-80 billion a year across stamp duty, business rates, council tax, and inheritance and capital gains taxes (roughly 10% of all tax receipts). And second, any reform creates losers as well as winners. 

Property taxes are a dependable source of revenue for the Exchequer, are relatively cheap to collect and cannot be easily avoided. An OECD study from 2008, often quoted in advice to Treasury ministers, represents the orthodox view among economists that recurring property taxes are also among the least economically distortive taxes. But that’s not true of all property taxes. 

Stamp duty is arguably one of the most economically damaging taxes in the UK – and increasingly so as thresholds have been held flat while house prices rise, and higher rates have been added. Council tax is famously based on property values from 1991 and is perceived as being horribly unfair across the country, with a two-bed flat in Grimsby paying higher council tax than its equivalent in Westminster. And the problems with business rates can be measured in the number of times governments have reviewed the system, only to fall back to offering temporary reliefs – some large, some small – rather than pursue more fundamental reform. 

More broadly, should policymakers be concerned that the UK relies too heavily on property taxes compared to other advanced economies – almost 4% of GDP compared with an OECD average of less than 2%? 

Getting it right matters

A badly designed system will undermine business investment, reduce labour market mobility, add to pressures on housing supply, and entrench wealth inequality. Many policymakers and commentators argue that this is the reality in the UK today. 

But none of the potential solutions are easy, requiring difficult trade-offs and an acceptance that any meaningful reform will create vocal losers, in addition to the winners. The influential Institute for Fiscal Studies has recently called on the Chancellor to pursue tax reforms ‘in a way that, ideally improves the design of the tax system and that, at a minimum, does not worsen it’, cautioning against piecemeal reforms to existing property taxes.  

The pressing need for additional revenue might trump the case for a more strategic approach come November. But a Budget that announced a broad-based review of UK property taxation, seeking to gather the best possible evidence around potential impacts, could be an important step towards lasting reforms that are pro-growth, progressive and affordable. 

To do this, the Chancellor would need to articulate a clear set of policy objectives and task the Treasury with running an open engagement process to invite views and understand the real-world impacts of reform options. Businesses with a stake in the property tax debate should watch carefully as the Treasury floats potential Budget measures over the coming weeks, and prioritise building the best possible evidence base to deploy at short notice. 

Flint’s team of former Treasury, HMRC and Office for Budget Responsibility analysts have direct experience developing and scrutinising major tax changes within government, and is uniquely placed to support you in developing and presenting your best policy positions. 

This blog was written by Vlad Novatchev, Ed Odell and Andy King. The authors all have extensive experience from working on tax and economic policy within the Treasury and the Office for Budget Responsibility.