Chancellor Rachel Reeves is planning a Budget tax raid on the owners of expensive homes, with new, higher bands of council tax seen as the best way to raise several billion pounds for the cash-strapped exchequer.
People briefed on Reeves’ thinking say that more radical options, such as creating a new levy on the value of homes or imposing capital gains tax on the sale of expensive properties, are much less likely.
Although no decisions have been taken, Reeves has said that higher taxes on the wealthy will be “part of the story” in her Budget on November 26. People close to her preparations say that “administrative simplicity” is key.
One person close to Reeves’ thinking said: “The idea of increased taxation on high-end homes is well established. The discussion is about how you do it.” Another said: “It is vital for the political balance of the Budget, to show everyone is paying their fair share.”
The idea of creating new council tax bands for the most expensive homes in England has been on the table in the Treasury since it was considered by Conservative chancellor George Osborne in 2012.
Many property industry experts see it as the “least worst option” among the various schemes mooted for taxing “mansions” — political shorthand for expensive homes.
Raising council tax on high-value homes might raise revenues in the low single-digit billions, economists say, making it a modest part of Reeves’ repair job on the public finances, which some analysts believe could require about £30bn in tax increases and spending cuts.
Even some wealthy property owners admit reform is overdue. Michael Sherwood, former Goldman Sachs executive, told the Financial Times this week that council tax was “very unfair”, adding: “If you have more expensive homes, you should pay more for them.”
The advantage of using the council tax system to increase taxes on housing wealth is that it already exists, albeit based on massively outdated 1991 valuations.
“I could see them doing a supercharged council tax for high-value properties — it’s one way to tax wealth,” said Ruth Curtice, head of the Resolution Foundation think-tank. “On its own it wouldn’t sort out the mess that is property taxation, but we do already pay council taxes and you’d be asking the wealthy to pay a bit more.”
One mooted alternative, charging capital gains tax on the sale of high value primary residences, was explicitly ruled out by prime minister Sir Keir Starmer before last year’s general election.
The idea has long been rejected by the Treasury, and Institute for Fiscal Studies senior economist Stuart Adam agreed it would gum up the housing market. “If opposition parties say they would scrap it, people simply won’t sell their home,” he said.
Another suggested alternative — a potential 1 per cent annual charge on the value of a home worth more than £2mn — is also viewed dimly in the Treasury, which is sceptical about creating a new system that would trigger a tidal wave of appeals against property valuations.
Osborne favoured additional council tax bands, with a mechanism to ensure the extra revenues flowed to the Treasury, not local authorities. He believed that putting homes in bands would lead to fewer appeals. The elderly and other “cash poor” owners of big homes would have been able to defer their higher council tax bills until they died.
Osborne backed the plan during the coalition government as part of a deal with the Liberal Democrats that would have resulted in the highest rate of income tax being cut from 50p to 40p. Ultimately prime minister David Cameron blocked the plan.
The Scottish government is also consulting on the idea of introducing extra council tax bands, as it seeks to make its own property tax system more progressive.
Council tax is imposed by local governments on residential properties and depends on the band the property is placed in — from band A for the lowest value properties to band H at the top of the market.
The regime is based on the value of properties in England as of 1991, and those values have not been comprehensively updated since, to the dismay of many economists and tax specialists. Properties in band H are those that were valued at above £320,000 in 1991.
A range of reforms is possible, and could include the radical step of a full revaluation of home values in England. However when she was asked by the FT about that idea before the election, Reeves said “It doesn’t really matter whether I think it’s sensible or not; is that where I’m going to put my political energy? No.”
A more targeted approach appears more likely. Among the simplest would be to simply double council tax rates on properties in the highest two existing bands, which could raise £4.2bn, according to the IFS.
An alternative approach would entail a targeted revaluation of properties in the top council tax bands and the introduction of a surcharge on homes above a certain value.
Property industry executives said that higher council tax bands might be the least damaging option. Lucian Cook, head of residential research at estate agent Savills, said: “Additional council tax bands would potentially be less damaging than a pure mansion tax or bringing the highest value homes into the ambit of capital gains tax.”
A regular, annual tax would not stunt the market the way taxes on transactions would, said Tom Bill, head of UK residential research at Knight Frank. The market would need time to reprice in the first few months, he said, but should then start to “tick over a bit more smoothly”.
Dominic Agace, chief executive of Winkworth, said the move could push elderly retirees to downsize. “I would expect it would mean an increased number of bigger properties coming to the market and, so, potentially downward pressure on prices for houses.”
Edward Troup, former permanent secretary at HM Revenue & Customs, said higher taxes on expensive homes could provide political cover for Reeves if she is also forced to put up taxes on “working people”. He said: “The idea of an effective and painful mansion tax on the wealthy feels like part of a consistent political package.”
The Treasury said: “We do not comment on speculation around changes to tax outside of fiscal events.”