Rachel Reeves has been warned that her reported plans for a mansion tax would not fill the £50bn Budget black hole – and that UK property taxes need a much wider overhaul.
The chancellor is said to be considering a levy on owners of properties worth at least £2m, who would face an annual charge of 1 per cent of the amount over that threshold – meaning a £10,000-a-year fee for homes worth £3m.
But Ms Reeves is now facing calls to go even further, with economists and MPs calling for a comprehensive reform of property taxes in Britain.
It comes as housing secretary Steve Reed repeatedly refused to rule out a mansion tax ahead of the Budget.
Former Institute for Fiscal Studies (IFS) director Paul Johnson told The Independent that the government should reform taxes so that council tax is proportional to the current value of a property, whilst also scrapping stamp duty.
Ex-Treasury economist Jonathan Portes agreed, saying that replacing council tax with such a proposal is “neither radical nor rocket science”.
However, they both warned that the mansion tax proposal wouldn’t raise anywhere near enough to fill a significant portion of the black hole the chancellor is facing, estimated to be as much as £50bn.
Chris Curtis, co-chair of the Labour Growth Group of MPs, told The Independent that the “way we tax property in the UK is clearly broken”.
“Council tax is still based on 1991 values and capped at the top band, so a small family home can end up paying not far off what a £50m Mayfair mansion pays every year,” he said.
“Then, when those mansions sell, stamp duty hits in one big lump and freezes the market. That’s upside-down, regressive day to day, and punitive at the point of moving, so it gums up the whole housing system.
“It is not easy to fix, but it’s only right that a progressive Labour government looks at how it can be improved.”
Mr Johnson said a mansion tax on properties worth more than £2m makes “some sense”, but he warned that it “wouldn’t raise anywhere near enough to fill a significant hole”.
“Such houses are definitely undertaxed at present,” he said. “I’d be much happier with a proper comprehensive reform of property taxes which made council tax proportional to current value and got rid of stamp duty.”
The chancellor is widely expected to use the Budget to increase taxes once again, with the IFS estimating that she needs to find £22bn via tax rises or spending cuts to meet her self-imposed fiscal rules.
Meanwhile, the National Institute of Economic and Social Research has suggested that the black hole could be as big as £50bn, as a result of sluggish productivity, government U-turns, and higher-than-expected interest payments.
Mr Portes said the reported mansion tax policy is “a start” but encouraged the chancellor to start the tax at a lower threshold.
“I would simply abolish council tax and replace it with a percentage tax. This is neither radical nor rocket science – it is simply doing what most other advanced economies do in one form or another,” he said.
“Of course they are not going to do this because it is a very big shift from where we are now, but they could and should say that is the long-term goal.”
He added: “I don’t think a mansion tax will raise a massive amount, certainly not compared to the overall requirement.”
There are also fears that a mansion tax would turn the economy into a “stagnant swamp” and freeze London’s property market.
Becky Fatemi, an executive partner at Sotheby’s, told The Telegraph high net worth individuals now see “no incentive at all to be here”.
She warned that the government is “shrinking the economy quite dramatically and breeding a stagnant swamp”.
Meanwhile, the Liberal Democrats have accused the government of a “tax grab” without reform.
The party’s treasury spokesperson and deputy leader, Daisy Cooper, told The Independent “there’s no doubt” that the way homes are taxed currently is “unfair”, pointing to council tax rates and stamp duty costs.
She added: “It’s right to look to see if there are ways to overhaul the system and make it fairer, but so far Labour’s aim with taxes has just been to try and grab more cash in the short-term, rather than properly reform them for the future.”
Asked about a mansion tax on LBC, Mr Reed said: “Well, I’ve seen some of the speculation about this and it’s never a good idea for a minister to come in and speculate.”
Pressed on whether he would support such a tax in principle, he said: “You are asking me to speculate, given that we’ve got the Budget coming up soon.”
When asked again, he added: “It’s best for me not to answer that question. It’ll sound like I’m giving the chancellor advice on what she should or shouldn’t do, and that’s not a good idea for a minister.”
It came after Ms Reeves’s former boss, ex-governor of the Bank of England Mervyn King, suggested on Sunday the government does not have a “coherent” tax strategy and that problems within the system cannot be solved by “just adding another wealth tax to it”.
