Simon Jenkins makes of his valued interventions this morning in the Guardian (I say that as he also makes some which aren't valued) when noting:
Vince Cable, Liberal Democrat hero, is most odd. He quotes Keynes on boosting demand, yet serves in a government that suppresses it. He wants to lend to business, yet pours money into banks that simply hoard it. Strangest of all, he calls for a "mansion tax" when there is one already. It is called the council tax.
Jenkins is right. I support the idea of a land value tax but recognise the problems of creating one. If we added bands I, J, K, L, M and maybe more to the current council tax banding and charged heavily progressive rates, reducing the tax due on lower bands at the same time we might overcome one of the gross injustices in the UK tax system.
Jenkins should go further though. I some time ago suggested an empty property tax for the UK. The TUC endorsed the demand. There are hundreds of thousands of empty properties in this country that could be in use, but aren't. By imposing a higher rate of council tax on these properties rather than cancelling the tax due on them they could be forced back into the market Do the same on sites with planing permission for housing where after two years they haven't been built and then you could force land into use. This is an LVT that's virtually "shovel ready now".
But there's one more thing to do. The Telegraph highlights this morning the extraordinary £34 million capital gain TV presenter Nick Ross has made on his home. Is that fair? Clearly not. He's gained by chance, not endeavour. No one needs a £34 million home. And he has one because hot money - much ex tax havens or fleeced from the economy by bankers - flooded into London to exclude most under the age of 40 from the housing market, maybe for life.
What can be done about this? Well, council tax reform as noted above. But also a tax on capital gains on houses too. I'd exempt all sales of less than £1 million from the charge - which is incredibly generous even in London (where house prices have to fall - and that is the intent of this tax). On sales above that the gain would be on that part of the sale price over £1 million less the same proportionate part of the cost of the property indexed by retail prices (not house prices: the measure is aimed to tackle excess house price inflation) over the period of ownership. Normal CGT allowances would also apply. I'd have the tax due at the owner's highest marginal income tax rates - but I have always believed that CGT and income tax rates should be aligned.
Yes the rich will squeal. I won't apologise: young people have to have access to housing and the inter-generational unfairness of current prices demands radical action, now. The most able have to pay.
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Council Tax a property tax? Up to a point, but it is actually regressive. I know pensioners paying over £1000 on single bedroom flats worth less than £100,000 whilst out there people with £1 mill and much more valuable properties are paying just over £3000.
We can make it progressive….that’s what I am suggesting
Once you accept that there should be a tax on housing you should go for something simple.
Individuals should be charged a straight forward percentage of the value of the property, minus some small homestead exemption amount when the individual is living in the property. Working in this way ensures a fairer distribution (rather than bands) and largely removes the need to charge capital gains tax on the sale of houses as you are collecting tax over an extended period of time. Soaring house prices increase the amount of tax due annually. This would help to put a lid on property prices because individuals would have that tax in mind when purchasing. It also encourages people to downsize in due course.
Charging capital gains taxes on the sale of a residence discourages the realisation of the gain and is a tax which might take a very long time to collect. It also discourages mobility, which isn’t really desirable. This sort of argument favours a wealth tax rather than capital gains tax in general, but if complexity is an option why not replace principal private residence relief with roll-over relief to ensure the tax is collected eventually and apply capital gains tax in the normal way. I believe this would be far less objectionable than the current special treatment afforded to housing compared to any other asset an individual might hold.
It is definitely strange that there is in essence a cap on council tax.
And how would you value the property annually?
Shall we be realistic here? Taxes have to work
It doesn’t seem to be a problem in Florida, they use this sort of system and have a population of around 19 million people in 7.6 million homes. In fact I believe most of the US states use something similar.
In simple terms you know the value of a property for certain when it is sold at arms length, which most transactions are. Using that information you then have a good idea how property values are changing over time in a specific area and you can use that to adjust the property prices you have on file for other properties in the same area. This information is readily available from the land registry. Other records let you know when somebody makes a substantial improvement to a home. You won’t have perfect accuracy, but you can be at least reasonably accurate and your figures will be far more discrete that the currency bands. You already need valuations to try to work out which bands properties fall into, but it is ridiculous that they remain static for many years. Ultimately some people may dispute a figure here and there, but you can then refine those figures accordingly. In fact as a starting point you could offer a 10% discount on the statistically assumed value but provide for a more precise valuation instead if a homeowner isn’t happy with the statistically provided figure.
I don’t think US is a good example of efficient taxation….
And price guides can be horribly inaccurate
Banding works
Live with it
“Horribly inaccurate price guides” were used to determine bands and to put homes into those bands in the first place, not exactly a good state of affairs.
I didn’t say the US was a good example of efficient taxation, but it is an example of a massive country that is able to update house price valuations on a much more frequent basis. The UK is still using house prices from 1 April 1991! How inaccurate can a price guide possibly be? The massive upward lift in value of Notting Hill property, relative to some other areas of London, isn’t going to show up because the data used to determine the band is over 20 years old!
Banding doesn’t work efficiently because you need to keep tinkering to introduce new bands and even after introducing a new band there will still be a cap on council taxes.
My suggestion is really no different to saying there should be a band for every £1,000. If you aren’t happy that we can be so accurate in estimating property value (and I think you might be right) then perhaps prices could be rounded down to the nearest £10,000 or something similar, but you still don’t need bands and that still eliminates an upper limit on council taxes levied and makes the taxes more granunlar.
“I support the idea of a land value tax but recognise the problems of creating one.” The problems are largely those of political will. The potential revenue stream is so large that necessary transitional reliefs could be well afforded. All other solutions are complicated, expensive and full of loopholes. The land market is totally dysfunctional. The current tax system sends out all the wrong signals.
Good suggestions, but one question. On the capital gains on houses over £1m, would the inflation adjustment be on the entire cost base or just the % of cost equal to sales prices divided by £1m?
I’d suggest that if sale price less £1 million was 25% of the total sale consideration then 25% of cost would be indexed for offset. Seems fair to me.
I’d suggest more progressive Council Tax banding along the lines you suggest in the short to medium term, Richard. In the longer term, maybe one way of introducing a land value tax would be to reassess each property for council tax but estimate the land value rather than the property value and use that for the tax base, either banded or using the exact land value in the way rateable values were used in the old rates system. Reassessments are long overdue anyway (haven’t been done since 1991 in England) so this would be an ideal way of killing two birds with one stone – getting the reassessments done and moving to LVT at the same time.
In May I visited a friend who lives in Los Angeles and he says that in California the property tax assessments are only done when properties are bought and sold; in other words, if you have just bought a house (and prices are rising) your property tax will be much higher than someone who’s been living in their house for several years. (Of course if prices are falling, the reverse is the case). This seems completely crazy to me and I may have understood my friend’s description of the system, but I’m not sure.
If LVT were implemented at a high percentage there would never be a capital gain on landed property because the price would reflect the building value only – and buildings wear out without constant renewal. Land value is the only element in property prices which varies with general economic climate, local investment (mostly public), pollution or natural degradation and fashion. Land is therefore traded as an asset and is the reason why we have a permanent housing crisis.
The UK is one of the few places in the world where sales of a principal residence does not attract capital gains tax. In Spain it is possible to roll over the whole amount generated by a sale into another property, but the any rise in the value of this new asset is taxed. In other words sell a house for £100 grand and buy another £200 grand then £100 grand is taxed (or simply buy another house for £100 grand then no tax is payable)
In a rational world any property is a diminishing asset in that from the moment it is built its material components start to decay at varying speeds; the only enduring asset is the ground value and the real guide to an objective house price.
In the UK ground values vary from nothing to many £millions and should be taxed accordingly.
To me the easiest thing to do is any new property transaction over 300-500k has triggers an additional .5% a year in council tax surcharge on the property measured at the transacted price , thus all existing homeowners are grandfathered in so you cannot complain about the little old lady in the house she had for 100 years, also using the transacted prices which are already used for stamp duty means there never has to be an assessment made, the additional cost to the council is minimal and the revenue builds over time …
In the interests of factual accuracy it may be worth pointing out that the UK has the highest property taxes in the EU. Now we can legitimately debate whether that system should be tweaked or refined, but let’s at least acknowledge that.
Evidence?
I have a booklet from the Brussels Tax Forum which seems to indicate this. But I’m sceptical. In particular I know that Sweden has a land tax which is actually paid via the PAYE system and the booklet is silent on this. Whatever is the case, our domestic property taxes are extremely regressive and in general are skewed towards business rates. With LVT on all land, homes will become vastly cheaper whilst commercial property prices will probably be not much affected (although the big property companies and investment houses will be howling when it is they who get the bill, not the renter). Another major effect will be to force developers to build or sell on their vast land banks – which are being held out of use for speculative purposes.
You mention that the £34million was “fleeced from the economy” by bankers. How so? Surely you agree that the property is a part of the economy, in which case that amount of money being spent in the housing money is also a part of the economy?
Also, how can you be sure that it’s underserved on Ross’ part? Maybe it was a clever investment? The article notes that he bought at after a recession, so it’s not a leap of the imagination to conclude that perhaps he expected the value of the property to rise by the time it came to sell? The article also states that part of the increase in value is because they’ve had work carried out to improve it. Surely that’s not “luck”; Ross and his wife chose to make improvements to their home, and surely must’ve known it’d add value. I don’t understand why it’s lucky to profit from the results of your investment, or even why it’s a bad thing if you do get lucky with an investment.
By the way, if you’re concerned about young people having access to housing (and as a young person who’s also concerned about my access to housing, your concern is touching), surely you’re more interested in freeing up planning laws so that more houses can be built? I mean, it’s a fairly basic observation that in many markets, high prices are a sign of low supply with relation to demand…
Oh come on – from the moment you suggest Ross might have deserved or even earned this you show how trite your comment is
As for more houses – hundreds of thousands of sites with planning permission are not being built on
The market is not working and supply side reform will not change it – it will only reduce the profit
With respect, you stand more chance of changing my mind if you engage with the substance of my questions, rather than calling them trite.
So to reiterate and expand on my initial comment, I’m coming at this from a couple of angles. Firstly, Ross invested money to improve the property, and that is almost certainly responsible for some of the increase in value. Surely then we can say that a portion of the profit is deserved, due to the investments he’s made. If not, can you explain why profit made on the back of a person’s investments is unearned? In a similar vein, he bought the property after a recession (and so – I assume – at the bottom of the market); as I said in my first comment, one might consider it a clever investment to buy something when it’s cheap and to sell it when it’s more expensive. If that’s the case, what’s wrong with that?
Secondly, let’s say it really was all fluke. He just bought a house, happened to be cheap at the time. He accidentally built a swimming pool(!), and then accidentally sold it now for a big profit. All complete luck. So what? I don’t have a problem with people getting lucky – all power to them, in fact. So what’s your problem with luck?
To be fair, I think the nuanced view is that both things happened. He made a good investment, but he also got very lucky with the state of the housing market. As I say, I don’t have an issue with either (at least, I don’t hold it against him; I do have an issue with the housing market, but my issue there is with politicians who don’t think things through).
As to “hundreds of thousands of sites”.. Yes, but… Getting planning permission for those sites is likely to have been expensive. If our problem is that houses are too expensive for first time buyers (I suppose I should phrase that as “if my problem is…”, given that I’m not a property owner and I imagine you are…), then surely we want to make houses cheaper? So surely reducing planning regs somewhat – reducing a big part of the cost of building new houses – might just help that? I don’t understand the argument to the contrary.
Read what I said: I asked for capital gains to be paid having allowed for a reasonable rate of inflation on sales over £1 million
So all his investment would not be taxed
And he’d have an inflation allowance
So I address all your points.
As for those sites – if it was so expensive to get them, build them. If not, forfeit them,. It’s really very easy. Instead monopoloy power is being used to hold up prices
Banks are rent-seeker in the most basic sense. They create money (credit) – lots of it – out of thin air which feeds directly into the land market via mortgages. The interest received is pure rent. With land as collateral (and they ain’t making any more of it, as is the saying) banks never have to worry too much about risk assessment.