- There is about £7.5 trillion worth of property in the UK, but we tax it in strange and inconsistent ways: residential council tax is regressive and its valuation system hasn’t been updated since 1993; businesses pay at high rates; and homeowners pay rapidly escalating transactions taxes (stamp duty land tax), but private residences are part-exempted from inheritance tax and exempted from capital gains tax.
- Transactions taxes are widely seen as especially damaging levies by economists: a representative Australian government review found their stamp duty destroyed 75p of wealth per £1 raised.
- This makes stamp duty land tax around 4x more harmful per pound than income tax and 8x more harmful than VAT; some alternative taxes, like a carbon tax, would have small economic benefits rather than harming efficiency.
- Taxing housing transactions keeps people in houses that are either too small, too big, or too far away from jobs, which are especially harmful when the housing supply is so tight, as it is in the UK today.
- In the short term the Treasury should abolish SDLT and replace the lost revenues by reforming council tax – fixing the regressive top end of the system with a more proportional, or even progressive, tax on rental and imputed rental values would bring in the needed revenues easily, with far smaller economic costs.
- Eventually the UK should rationalise its property taxation system by abolishing SDLT altogether, and then rolling council tax, and business rates into one system, with everyone paying the same rate, set at roughly 20% of imputed rental income, comparable to extending VAT to property services. This would be roughly fiscally neutral on a static analysis, but may lead to large increases in revenue over time, which should be used to reduce other taxes.
- The UK should consider decentralising property taxation, but this is a separate step which does not need to be considered simultaneously. Abolishing SDLT is attractive whether or not the overall local taxation and governance system is reformed.
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