The taxation of high value property has been under scrutiny since the March budget increased rates of stamp duty on properties over £2 million. The debate has been refuelled recently by renewed discussion of the merits of a mansion tax or other ‘wealth tax’.
Although increasing the tax on high value property is an 'easy sell' politically the economics may be more difficult to justify. Contrary to common perception, high value homes already make a disproportionately large contribution to the tax take from residential property.
To avoid unintended consequences, such as declining taxable activity, it is essential to understand both the effectiveness of further taxation and the impact it may have on the prime housing market and those active in it.
The Council Tax Debate
Council tax is arguably the one area of taxation where high value property makes a disproportionately low contribution to the tax take, and then only in some locations. As a result it has been suggested new council tax bands be introduced, replicating measures already undertaken in Wales. Properties in the top two council tax bands (G and H) account for 4.1% of the housing stock and £2.1 billion in council tax receipts.
Council tax valuations and the corresponding bands are undoubtedly outdated. But if council tax is a locally based tax designed to contribute to local authority budgets, then a council tax revaluation could redistribute the existing liability but would be tax revenue neutral.
The costs of administering a wholesale revaluation would be difficult to justify in these times of austerity, but a partial revaluation designed to bring in a new band for super prime property would be a more cost-effective option.
Targeting only properties in the highest council tax band would still require a revaluation of 130,000 properties, while targeting the top two council tax bands (G and H) would require a revaluation of some 940,000 properties.
More pertinently, it is questionable whether it is the council tax bands that are at issue or the charging structure of the tax.
Band H properties account for just 0.6% of the housing stock in England. Even in the central London boroughs of Westminster and Kensington and Chelsea they account for 14% of all housing. These band H properties currently contribute approximately £320 million in council tax receipts with an average council tax bill twice the national average.
Each local authority currently sets council tax charges with regard to their specific financial needs. It then distributes the total requirement by reference to the make up of the housing stock within that local authority.
This means the amount of council tax payable for properties in the same band varies across the country and in higher value boroughs, where band H properties are most common, the council tax charges for band H properties are the lowest.
It is this difference between charges for properties in the highest council tax band that causes the inequalities that are so frequently referred to, even though the charge for a band H property is universally set at twice that of a band D property in each distinct charging area. If there is a desire to distinguish more between taxation levels of high and low value properties, it is these universal proportions that need to be changed.
To put this in context, in the 10% of local authorities charging the most for a band H property the annual council tax charge for such a property was £3,223 in 2010. By contrast, in the lowest 10% it was £2,465. Only in Wandsworth (£1,374), Westminster (£1,376) and the City of London (£1,878) are they below £2,000 per annum.
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