The radical land tax proposal that has garnered support from both the Right and the Left
Property is in the crosshairs as Reeves scrambles to plug Britain’s £22bn ‘black hole’
Early in his career Winston Churchill attacked what he called “the mother of all other forms of monopoly”: land.
Profits from rising land values were not only “unearned”, Churchill warned in a 1909 speech, but “positively detrimental to the general public” because high land prices become a barrier to development.
Churchill would go on to lead the traditional party of rural landowners – the Conservatives. But at the time he was in the ruling Liberal Party, whose chancellor, David Lloyd George, had proposed a land tax.
However, instead of redistributing wealth across the country, the plan triggered a constitutional crisis and two general elections.
More than a century on, calls are growing for Rachel Reeves, the incumbent Chancellor, to do what Lloyd George couldn’t: abolish Britain’s current system of property taxation – which now consists of council tax, stamp duty and business rates – and replace it with a land tax.
Such a levy would be a flat tax charged annually based on the value of people’s land, and potentially the buildings on top of it.
The radical proposal has garnered surprisingly broad support, from John McDonnell, who once brandished a copy of Mao’s Little Red Book in the House of Commons, to a former adviser to Rishi Sunak.
Campaign group Fairer Share is preparing to send a joint letter from a variety of cross-party MPs and peers to the Chancellor in the next month, calling on her to look at the idea. Supporters of the campaign include Labour peer Dame Margaret Hodge and Kevin Hollinrake, shadow business secretary.
Writing in the Financial Times earlier this month, Charles Goodhart, former Bank of England economist, argued that Reeves has “the best chance since Lloyd George” of introducing a land tax.
Labour has a massive majority and the House of Lords is no longer as dominated by Tory peers as it was back in 1909, he told The Telegraph.
Punishing the wealthy
Supporters argue that a land tax could simultaneously unlock growth and provide additional revenue for the Treasury.
But overhauling the system would punish wealthy land and property owners from Wimbledon to Windsor. If it were done wrong, it could also trigger a heavy slump in property prices that would hurt anyone on the property ladder.
Even many critics of a land tax agree, however, that our existing system of property taxation is a mess.
Stamp duty is only charged when people buy a house and therefore discourages people from moving, making both our housing market and labour force less efficient.
Council tax is based on property valuations from 1991 and contributes to major regional inequalities.
In Westminster, one of the richest boroughs in the country, the annual council tax bill for a typical home this year is £973. By contrast, in Hartlepool, a heavily deprived part of the country, homeowners in the equivalent tax band are charged £2,278.
“Imagine if Labour were to serve two terms – that 10 years of government would take us to 2034,” says George Dibb, associate director of economic policy at the Institute for Public Policy Research (IPPR).
“We’d be looking at using property valuations that were more than 40 years old for council tax. That just seems utterly unfeasible to me.”
Then there are business rates, a land-based tax for businesses that critics say is out of date and doesn’t reflect the rise of online shopping nor the declining value of high street premises.
Supporters of reform put forward several possible solutions.
Stuart Adam, senior economist at the Institute for Fiscal Studies and an author of the 2011 Mirrlees Review of the tax system, argues that the best route would be taxing the value of both land and buildings for residential property, while only taxing land for business properties.
Goodhart argues tax should only be imposed on the value of land, not the buildings on it, so as not to discourage construction.
Fairer Share argues that some tax needs to be imposed on buildings otherwise local authorities with very low land values would receive too little council tax.
It proposes scrapping council tax and stamp duty and replacing both with a flat 0.48pc rate across the whole value of a home.
Winners and losers
There would be winners and losers. Analysis for Fairer Share found its proposals would mean a tax cut for 77pc of the country and a rise for 23pc.
Residents in the City of London, Westminster and Wimbledon would see the largest proportions of homeowners losing out.
A typical homeowner in north Cornwall would save on average £700 per year while a typical homeowner in Kensington would see their tax bill go up by £1,100.
Fairer Share has suggested capping the extra cost for wealthier households at £1,200 per year until a person moves and gets the benefit of paying no stamp duty.
Land tax has widespread support on the Left.
John McDonnell, the former shadow chancellor and now an independent MP, is president of the Labour Land Campaign, which has campaigned for a land tax since the 1990s.
The centrist Tony Blair Institute (TBI) has in recent years also called to “shift the balance of taxation away from earned income towards unearned income and land and property”.
“The UK’s warped system of property taxation is in urgent need of reform – the current system is a constraint on growth,” says Thomas Smith, the TBI’s director of economic policy.
Surprisingly, there is serious support on the Right too.
Tom Clougherty, formerly head of tax at the Centre for Policy Studies and now head of the Right-wing Institute of Economic Affairs, has called for land-based taxes very similar to the proposals put forward by Adam at the IFS.
Tim Leunig, a former adviser to Rishi Sunak, last week published a paper with the centre-Right think tank Onward calling for stamp duty and council tax to be replaced with two separate forms of a proportional property tax.
He argued for council tax and stamp duty to be scrapped and replaced with both a local and national land tax.
Reeves may be being presented with the idea closer to home.
In 2021, IPPR published a report arguing that replacing stamp duty and council tax with a combined property and land tax would address inequality and build a stronger economy. Carys Roberts, the think tank’s former executive director, was hired as a special adviser in the Downing Street Policy Unit in July.
The Labour manifesto did not discuss residential property taxes, bar a plan to add one percentage point to stamp duty rates for overseas buyers. It did promise to “replace the business rates system, so that we can raise the same revenue but in a fairer way”.
The Treasury declined to comment on whether the Chancellor is considering a land tax.
Reeves has made clear that tax rises will be in the pipeline at the Budget as she scrambles to fill a £22bn blackhole in the public finances. But most of the economists backing property tax reform argue that it should be revenue neutral at least initially.
Using land tax as a revenue raiser would be potentially destabilising if it were introduced too fast. Goodhart calculated that raising £22bn immediately through a land value tax would trigger a 7pc drop in property prices.
Andrew Dixon, founder of Fairer Share, isn’t holding his breath.
“I don’t think, at this stage, she will be brave enough to tackle the property tax issue,” he says of Reeves.
But he adds: “The thing that may sway it is the need for growth.”
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