Private Rent Houses | House prices and older homeowners would be hit by tax hike

Landlords

House prices would be hit and many older people forced to sell family homes by an increase in council tax to “fix the broken housing market”, as proposed by an influential think tank today.
Many homeowners might question in what sense the housing market is “broken”, when property is one of the few assets that has delivered decent returns in a dismal decade or more for stock markets, pensions and other stores of value. Alternatively, rising numbers of younger people excluded from homeownership and trapped in ‘generation rent’, may feel that anything which tends to cause house prices to fall must be a good thing.

Against all that, neutral observers may suspect that when anyone argues the answer is “higher tax”, perhaps they are asking the wrong question. But the Joseph Rowntree Foundation (JRF) report could prove sweet music to the ears of Business Secretary Vince Cable and shadow chancellor Ed Balls; both of whom have recently spoken in favour of raising taxes on homeowners.
The think tank claims: “Political leaders must find the courage to reach consensus and implement radical tax reforms that will help repair the UK’s broken housing system and stave off another damaging crash.”

Specifically, it calls on politicians to revalue council tax bands to reflect “real house prices and act as a brake on house price inflation”.

Kathleen Kelly of the JRF, added: “As MPs gather for their party conferences and the new housing minister settles in, now is the time to fix the underlying problems in the housing market. It will take huge political courage to achieve this – but we cannot afford to leave people or our economy helplessly exposed to our volatile housing system.

“We need radical tax reform that would reduce volatility and offer a better deal to millions of households, while developing alternatives to ownership so people have access to stable tenancies in both the social and private rented sector.”

Richard Mannion, a director at accountants Smith & Williamson, agreed that council tax is inconsistent. He said: “The starting point is that each authority decides how much it needs to collect and this figure is then allocated between all households according to a formula so that the lowest value property contributes 67pc of the average and the highest value property contributes 200pc of the average.

“Currently there are eight bands of value, but ‘value’ for this purpose is based on 1991 values in England and Scotland. Newly constructed properties are also assigned a nominal 1991 value.
“The way that the allocation is done means that someone who lives in a mansion worth millions – which would be in Band H – will pay just three times more in rates than someone who lives in a tiny one bedroom flat – which would be in Band A.

“That raises the question whether all households should contribute on a broadly equal basis because the cost of services should be split by the number of people who enjoy them or whether council tax ought to be regarded as a property tax to be allocated according to the size and value of the properties in the area.”

George Bull of accountants Baker Tilly pointed out: “Taking a tax which was originally designed to part-fund the services provided by local government in each county and morphing it into a major instrument of social policy may be courting disaster. Surely it would be better, if this approach is to be adopted, to scrap the council tax and start again?

“The aims underlying the report are laudable but tax should not be seen as a cure-all. For example, it is not so many years since mortgage interest relief was scrapped for people’s own homes. Before the crash, that didn’t
seem to affect mortgage lending or house price inflation in the way that had been expected.
“In the short term, the number of vacant dwellings and unsellable homes – just have a look in the estate agents’ windows – suggests that mortgage famine is a bigger problem than new home starts.
“A property tax such as proposed will inevitably reduce property values in the short-term, as a step to achieving the desired stabilisation. This will not be popular among existing homeowners.
“If the new tax is restricted only to property, owner-occupiers may have to trade down if a new tax makes their current property unaffordable.”

Widows and other older homeowners would be particularly vulnerable to a tax that is based on the false premise that people who are asset rich also enjoy good cashflow. Indeed, the opposite is the case so often that a multi-million pound industry has been set up to service it with equity release schemes and home income plans.

Put simply, many older homeowners are asset-rich but cash-poor, often because their pensions have been plundered by higher taxation. Despite those facts, politicians including Messrs Cable and Balls still clearly believe they need our money more than we do.

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