Seize the Brexit opportunity to rethink property tax in London

 
Richard Brown
London Wealth Continues To Grow
We have a council tax system based on property valuations from 1991 (Source: Getty)

Over the past 25 years, London has attained a position as a pre-eminent world city.

It still tops league tables – for ease of doing business, for its diversity, for its cultural and educational offer.

But since the EU referendum, competitor cities have been circling, seeking to lure businesses from London. Meeting their challenge requires not just the right Brexit deal, but more fundamental reform too.

Read more: Why a new wave of foreign millionaires is poised to buy prime London homes

There is still all to play for in the Brexit negotiations. Centre for London’s new report, Open City: London After Brexit, argues for a deal that protects London’s position and its contribution to the UK economy.

We are urging government to retain freedom of movement and access to the Single Market during a transitional period, and to replicate frictionless access to talent and trade in long term arrangements.

But Brexit raises some bigger question about how London sustains its position. For many Londoners, whether born in the UK or overseas, living in the city is becoming increasingly tough: house prices and rents are spiralling up, public transport and streets are congested, infrastructure is feeling the strain of a city with more residents than ever before.

Affordability constraints hit the restaurants and hotels that sustain London’s global services, and the cultural and creative buzz that gives London its “soft power” and also makes it a magnet for talent.

If London is to thrive outside the EU, it needs to sharpen its offer for workers and businesses alike. We need to build more houses, but also to look again at the framework of incentives put in place by our current system of property taxation.

We have a council tax system based on property valuations from 1991, which charges Mayfair townhouses a mere three times more than the smallest studio flats, and a fraction of what businesses would pay in the same premises. Meanwhile, stamp duty land tax, which raises half of its English revenue in London, taxes transactions, seizing up the property market and providing an unpredictable tax base.

Our report supports the arguments of the London Finance Commission that these and other property taxes should be devolved to the Mayor and to London boroughs, so they can work together to design a tax system that works for the capital by promoting the efficient use of scarce land in a growing city.

Once taxes were devolved, they could be reformed. A revaluation of domestic property would be a starting point, reflecting the wide differences in how house prices have moved since 1991. To make council tax more progressive, more bands could be added – as has happened in Scotland and Wales – or the ratio between the top and bottom tax levels could be expanded from 3:1.

A more radical option would be to tax property value or rental value (the same approach used for business rates). We estimate that a rate of seven per cent of rental value would have a minimal impact on mid-range homes, while increasing bills to £3,000 plus for more expensive homes, and reducing them to less than £600 for the cheapest.

Going one step further, you could consider taxing land value.

Land value taxes have been discussed for more than a century. Their proponents argue that they would discourage land banking and low density development. As they do not tax economic activity but only the economic rent arising from a fixed quantity of land, they encourage efficient use and development.

We estimate that a land value tax of 2.3 per cent could generate the same revenues as council tax and stamp duty together.

Land value taxes are highly controversial, but Brexit both creates the opportunity to rethink how London works for all its citizens, and makes the task urgent.

London will need to be open, livable and affordable to tackle the threats posed by Brexit and capitalise on its opportunities. London’s Mayor, boroughs, and businesses should argue strongly for the powers that will sustain London’s place in the world.

Read more: Crest Nicholson's tax scheme crumbles on tribunal outcome

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