A coherent approach to housing taxation

The funding of local government has been a difficult issue for political parties. At best proposals have been sticking plaster solutions because change is viewed as being politically challenging. UNISON Scotland is arguing that we simply cannot go on as we are with short-term fixes that damage services and undermine local democratic accountability. We need to develop a new consensus that provides a long-term solution. To that end we have published a briefing and a discussion paper on a new property tax for Scotland.

The Institute of Fiscal Studies have also recently made a contribution to this debate with a paper, "Housing Taxation and Support for Housing Costs" by Stuart Adam.

He argues that the the UK’s system of housing taxes and benefits falls well short of a coherent design, “housing is a consumption good, an asset and an essential for life, and its treatment in the tax and benefit system needs to reflect all of those aspects.”

These are some of the key reforms he believes would help to improve the system:

Housing consumption should be taxed like other consumption: subject to VAT when new or to an equivalent tax levied on the stream of services it provides. Britain’s council tax, which is currently based on 1991 values in England and Scotland, should be reformed to relate it more closely to actual property values: levied as a uniform proportion of up-to-date rental values with no cap and no discount for unoccupied or single-occupancy properties.

Taxation of rented housing should be reformed by offering landlords an allowance against a ‘normal’ return to their investment (and by aligning capital gains tax rates with income tax rates).

The UK’s stamp duty on housing should be abolished and the revenue replaced by part of the reformed council tax.

There is a case for allowing home-owners who lack the liquidity to pay the tax to defer payment (with interest) until sale of the property or death.

Those who lack both current income and assets should be entitled to financial help towards their housing tax, and indeed towards their housing costs more generally. Preferably this would form part of a larger integrated benefit rather than requiring a separate means test and procedures.

Stuart Adam said: “There is a set of principles for housing taxation that should be applied in any modern economy. Large changes need to be phased in carefully, but this is an area where current UK practice is a long way from an economically rational and efficient system.”