Could a review of council tax be the antidote to Labour’s mansion tax?
February 16, 2015
As the New Year dawned, Jim Murphy triumphantly announced that Labour would ‘tax houses in London and the South-East to pay for 1000 new nurses in the Scottish NHS’. The coupling of Labour’s mansion tax policy to its battle-to-the-death north of the border with the SNP was doubtless deliberate. The Scottish Labour leader knows only too well that his focus on two targets of Scottish resentment – London and the well-off – would play wonderfully with his audience.
Alas, these messages resonate south of the border too. The notion of Londoners as a cash cow, able to fund all manner of policy promises, has gained widespread traction in recent years. The Capital city sparkles with success and is brim-full with confidence at a time when other parts of our Kingdom struggle. Increasingly people speak of London’s alienation from the rest of the UK as the metropolis gobbles talent and makes its compelling case for ever-increased infrastructure budgets.
Meanwhile, the issue of housing in London itself has become toxic. Boosted by the weakness of sterling and the perception of the UK as a safe haven, foreign money has flooded the capital’s prime housing market. As the international enclave expands in the central boroughs, so too have prices been driven up in outer suburbs. It is getting tough now even for well-paid professionals to buy homes as population growth exacerbates supply issues, high rents gobble funds for deposits and prices get a boost from artificially low interest rates. As a result, passionate debate about the imposition of a ‘mansion tax’ now rages as a means of addressing the resentment felt both from the rest of the country towards its capital, and from those Londoners excluded from the property bonanza.
I have written before about why I vigorously oppose such this levy, which has been advocated by both Labour and the Liberal Democrats. Undeniably, however, we Conservatives risk being left behind in public debate on these issues if we fail adequately to address the resentments behind the mansion tax’s popularity. I think our voice on these issues can be found if we grasp the nettle on council tax.
The council tax was introduced as the primary source of collecting income from residents by local authorities in April 1993, hot on the heels of the ill-fated and short-lived poll tax. As we know, the levy for councils in England is calculated by allocating a dwelling to one of eight bands, A to H. This allocation is made on the basis of a property’s assumed capital value. But that assumption has been based on prices as they stood on 1 April 1991. The tax is not even particularly proportionate to property values, with the same amount levied on all homes valued at over £320,000 in 1991 prices. This means that around half of all houses in the capital are now placed in the same council tax band even if their size, location and value are vastly different. A Knightsbridge oligarch, for instance, is paying £1353.48 annual council tax for a £60 million home – exactly the same as properties worth one-thirtieth that sum.
If the outdated system of valuation seems ludicrous, it can be explained by a concern amongst politicians that the process of revaluation would be contentious, difficult and potentially costly to voters. But there is a solution that is neither overly complex nor anything like as painful as a mansion tax. More important still, it could come with a big upside when it comes to the provision of affordable housing.
Currently all banding ratios are set down in statute, but the government could allow local authorities to set their own bands for H and above, with Bands A to G remaining at their existing statutory ratios. A ceiling could be set so that council tax would always be limited to, say, Band J being three times the existing Band H charge to ensure that this does not become a mansion tax by the back door.
Let us take Westminster as our example here. In this Central London borough, a Band H property would now likely be worth over £2 million and there are now just under 15 000 of such homes. But there is a vast difference between a £2 million flat in Pimlico and a home valued at £60 million at One Hyde Park. So the local authority might be empowered to impose two additional bands – there could be, for instance, Band H for prime properties worth between £2 and £5 million; Band I for so-called ‘intermediate prime’ properties in the £5 to £15 million bracket; and finally Band J for super prime properties worth over £15 million. Incremental targeting of the highest value properties could be accompanied by a new localised council tax support scheme that would allow specific instances of individual hardship to be addressed.
Crucially, however, the government ought to ensure that all additional council tax or prime property tax income over and above the existing band structure could be retained by the local authority on the specific proviso that it be earmarked exclusively for affordable housing in the area. This positive, localised proposal could be a far more eye-catching and exciting way of countering the envy-driven mansion tax and tackling perceived housing inequality.
It would also chime perfectly with the spirit of the age. There are strong currents pushing towards further devolution of central powers. London in particular would surely be able to make a compelling case for localised revenue-raising if Scotland is to become ever more autonomous. Meanwhile, the enormous and growing pressure on London’s housing supply will see an ever stronger case being made for money raised in the capital from its prime housing stock to be retained in-city for the provision of affordable housing. Politically, there is a strong case to make too. Residents in prime central houses are paying around a third of what they were in rates compared to the 1980s while the burden for those further down the scale has increased proportionally. Reformers should take this opportunity up with relish.
This proposal avoids the complexity of revaluation though it should regardless be noted that such complexity is fast reducing with the rise of online property sites able to provide accurate historic and current market assessments. Would it really be difficult for a system of self-assessment to be established, such as that set up in France for the ‘wealth tax’, whereby the worth of the equity in a property is submitted on an annual basis and can be challenged by the Town Hall if it is thought not to be an accurate assessment of market value?
While we Conservatives must never give into the politics of envy, the wider support for a mansion tax among many fair-minded people is in part a reflection of a collective failure to review property taxes comprehensively. It is time we finally tackled the outdated system of council tax in a way that allows for genuine local discretion and gives local authorities a new route for boosting affordable housing at a time when London in particular desperately needs it.