Council Tax is outdated, regressive, and, despite being notionally based on the value of homes, functions in many ways like a poll tax – exactly the type of tax it was designed to get away from – insists the Resolution Foundation today in a major new report.
Home Affairs, the 18th report for the Foundation’s ongoing Intergenerational Commission, looks at how residential property is currently taxed – largely through Council Tax and Stamp Duty – and options for reform.
The Foundation notes that the hugely unpopular poll tax (the Community Charge) was pronounced a failure and abolished in 1991, in part due to the unfairness of a flat rate tax where households generally paid the same amount irrespective of the value of the property they lived in.
But new Resolution Foundation analysis shows that today’s Council Tax shares many of the features of a poll tax, in particular in having only a very weak link to property values. This is because Council Tax operates within wide bands with a single band covering significantly different property values, has only very small gaps between bands compared to differences in property values, and because regional variation has allowed some areas with more expensive homes to charge lower tax rates.
The report goes into more detail on these key points:
- Wide bands: Among band A homes in the North East, the lowest value tenth of properties were worth £65,000 or less in 2015-16, while the highest value tenth of properties were worth at least £130,000. Given they face the same tax bill, this results in effective Council Tax rates (tax as a proportion of property value) at least twice as high at the bottom of the band as at the top.
- Small gaps between bands: Typical Council Tax bills are only 3.3 times higher for the most expensive homes in band H as for the cheapest in band A (£2,595 and £775 respectively). By contrast, typical property values were almost seven times as high (£750,000 and £110,000 respectively).
- Local variation on rates and out-of-date valuations: Local areas with high value homes can opt to charge low Council Tax rates, causing vast regional disparity. Alongside faster house price growth in the south of England than elsewhere since properties were last valued 27 years ago, this means that the typical effective tax rate was around three times as high in the North East as in London (0.7% and 0.2% respectively).
Council Tax Should be Abolished, Insists the Resolution Foundation
The Foundation notes that the poll tax-like structure of Council Tax means it is highly regressive; someone living in a property worth £100,000 pays around five times as much Council Tax relative to property value as someone living in a home worth £1m. This is exactly the kind of result that opponents of the poll tax wanted to avoid and in stark contrast to Income Tax, which increases with incomes in a progressive way so that higher earners pay a higher average tax rate.
Even more severe inequalities are evident when focusing on individual homes, even those that are of similar sizes and very close to each other.
The issues above, especially the failure to update the property values used to decide which band a property falls into since 1991, can make a mockery of the idea that Council Tax is linked to property values. For example, a three-bedroom flat for sale for £2.1m in Battersea, London faces a Council tax bill of £700 per year. Walk just one mile away and a three-bed flat in Lambeth, for sale at less than one fifth of the price (£400,000), faces a Council Tax bill of £1,160 per year – 66% higher.
The report indicates that young families are being disproportionately and increasingly hit by these major flaws. 85% of households in their 20s live in the bottom three Council Tax bands, which have the highest effective tax rates, up from 79% two decades earlier. As a result, the typical Council Tax rate as a proportion of property value is 0.54% for those aged 30-49, compared to 0.43% for those aged 80+.
Flaws in the design of Council Tax also particularly harm younger households facing high barriers of entry into homeownership. For instance, second homes and empty properties are, on the whole, still subsidised, while house prices have been pushed up by the fact that property is under-taxed relative to other investments.
The Resolution Foundation has examined several suggestions that have been made to reform the current Council Tax system:
- Replicating the 2017 reforms implemented in Scotland across England and Wales, which involved increased Council Tax rates in the top four bands, generating a little over £1 billion.
- Adding a mansion tax surcharge of 1% on the value of properties above £2m and 2% on the value of properties above £3m, which would also generate just over £1 billion.
More radical scrap-and-replace options that get further away from the poll tax-like structure of Council Tax by introducing a new proportional or progressive property tax related to up-to-date values are also assessed:
- An exactly proportional tax of 0.5% of capital value would raise £1.6 billion across Great Britain compared to Council Tax.
- A 1% tax rate above a £100,000 allowance per property would mean no tax for the bottom 14% of properties nationally, and would make effective tax rates progressive above this. This would boost revenue by £8.6 billion.
- A more progressive system of tax bands of 1% above a regionally-specific tax-free allowance (to ensure the least valuable 10% of properties in each region are tax free), and a higher rate of 2% on marginal property values above £500,000 would raise £8.4 billion.
While any reform on this scale is difficult, the Foundation notes that support for such a change could be built. There would be many more winners than losers across age groups – 17m households would be better off, compared to 9m worse off under the most progressive option outlined above – and some of the extra revenue raised could be used to reduce the highly unpopular Stamp Duty significantly.
The Foundation also suggests cushioning many low income, often older households, through enhanced support to meet tax bills, through the benefits system and the ability to defer payments.
New technology and lessons from other countries also suggest that a system based on regular revaluation of property prices is now very much possible, removing one of the main obstacles to reform.
The Principal Researcher at the Resolution Foundation, Laura Gardiner, comments on the report: “Despite replacing the unpopular poll tax, Council Tax has come to look increasingly like it. It’s time we looked to abolish it. The Council Tax you pay is meant to be tied to the value of the property you live in, but, when someone living in a property worth £100,000 pays a tax rate five times higher than someone living in a property worth £1m, something has gone seriously wrong.
“Young families and those in relatively cheaper properties are losing out disproportionately. The Government should implement a new system that is truly progressive and avoids the ludicrous situation of people in mansions paying little more, and in some cases less, than families living in tiny flats.”