Reeves considers replacing stamp duty with new property tax | Tax

The Treasury is considering a new tax on the sale of homes worth more than £500,000 as a step towards a radical overhaul of stamp duty and council tax, the Guardian has been told.

As Rachel Reeves prepares the ground for tax rises in this autumn’s budget, senior ministers have tasked officials to study how a new “proportional” property tax could be implemented and model its impact before reporting back to ministers, who have been briefed on the proposals.

Officials are initially examining a potential national property tax, which would replace stamp duty on owner-occupied homes, sources said. They are also studying whether, after the national tax, a local property tax could then replace council tax in the medium term in an effort to repair battered local authority finances.

No final decisions have been made. A national tax could be implemented during this parliament, while it is understood an overhaul of council tax would take longer, at least requiring Labour to win a second term in office.

The policy options are being considered as part of a large tranche of work within the Treasury aimed at tapping into the vast cumulative rise in house prices in recent years that risks entrenching inequalities and making council tax – which is based on early 1990s property values – more unfair.

If the plans came to fruition, they could provide valuable political cover for Reeves, both in terms of raising extra revenue without breaking Labour’s pledge to not raise levies on working people and as policies that would be likely to appeal to many of the party’s MPs and members.

There has been increasing pressure on the chancellor to consider more wealth-based taxes, notably from the deputy prime minister, Angela Rayner, and the additional tax on more expensive homes could be presented in this light.

The national tax would be paid by owner-occupiers on houses worth more than £500,000 when they sell their home. The amount paid would be determined by the value of the property, with the rate set by central government, which would directly collect the proceeds via HMRC. It would not replace stamp duty on second homes.

Current rates of stamp duty vary depending on whether someone is a first-time buyer and are banded in steps upward depending on the value of the property being bought and sold.

It would take time to phase in a replacement to stamp duty, and a range of options are being considered for phasing in changes. The revenue raised by stamp duty on primary residences varies considerably from year to year, depending on housing market conditions. In the last financial year it raised £11.6bn, according to government figures. Over time, it is believed the new national property tax would be a more reliable, consistent source of revenue and ultimately raise the same amount as stamp duty.

The levy would only affect about a fifth of property sales, compared with about 60% with current levels of stamp duty, which is paid by the buyer of a home. The average price of a home in the UK was £272,664 in July, according to Nationwide.

Sources said that Treasury officials are, in part, drawing on the findings of a 48-page report from the centre-right thinktank Onward, which was published in August last year.

Onward’s report proposes a dual approach of a national and local “proportional property tax” on property, based on its value. It is written by Tim Leunig, who worked as a government adviser for more than a decade and was closely involved with devising the furlough scheme during the Covid-19 pandemic.

Leunig wrote: “These proposals would make it easier and cheaper to move house, for a better job, or to be near family, as well as being fairer. It should not be the case that a terrace house in Burnley pays more than a mansion in Kensington – and it wouldn’t be under these proposals.”

The government has already showed signals of adopting some of the steps towards council tax Leunig laid out in his report: “The first step would be to end the overfunding of various councils in affluent areas of inner London, particularly Westminster, Wandsworth and Kensington and Chelsea councils.” This is similar to the approach laid out this summer in a consultation on how to redistribute from richer to poorer councils.

The idea of a new local annual property levy to replace council tax was also proposed by Onward. That plan would result in owners, rather than the residents, of a property worth up to £500,000 paying varying rates of tax dependent on the value of their home. They would pay a minimum of £800 a year and the funds this generates would go directly to local councils, whose finances have been severely stretched in recent years.

Rayner has already raised the prospect of ramping up redistributions of funds to address regional inequalities, which she has argued are exacerbated by the existing council tax system, which replaced the poll tax in 1993.

A spokesperson for the Treasury said: “As set out in the plan for change, the best way to strengthen public finances is by growing the economy – which is our focus. Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8bn and cut borrowing by £3.4bn.

“We are committed to keeping taxes for working people as low as possible, which is why at last autumn’s budget, we protected working people’s payslips and kept our promise not to raise the basic, higher or additional rates of income tax, employee national insurance or VAT.”

Economists from the right and left of the political spectrum have heavily criticised stamp duty and council tax.

In June, the government launched a consultation on how to reform the allocation of funds raised by council tax. Labour said the “fair funding review” aims to fix the “broken funding system we inherited” which has “left local authorities across the country in crisis”.

The strategy has already met a backlash after it emerged deprived inner-city London councils stand to lose millions of pounds.

The Institute for Fiscal Studies, an economic thinktank, has said that while reform was very much needed, the proposed changes in the government’s funding review appeared to run counter to an “expectation that deprived and urban areas would win at the expense of more affluent and rural areas, the government’s baseline funding reform proposals are not particularly redistributive to poor, urban areas of England”.

While any wealth-related tax could provoke strong criticism from rightwing opponents, ministers have shown willingness to ignore such criticism for policies that generally affect wealthier people, such as adding VAT on private school fees and changes to inheritance tax for some farms.

If billed as a part of a longer-term replacement of stamp duty, this could also be helpful given the existing levy is unpopular and widely seen as a blunt tool and a block on the property market.

Using property taxes as a replacement for council tax would be complex to implement and almost inevitably require a second term in office, but there is an increasing acceptance among all the main parties that the current system for local government funding is obsolete and unviable.

Labour has already committed to the biggest shake-up of council structures in England for decades but does not want to oversee the predicted series of local authorities declaring effective bankruptcy, especially as many will be run by the party.

The Guardian last week revealed that the Treasury was also looking at ways to raise more money from inheritance tax in an attempt to ease pressure on the country’s finances, in the run-up to Reeves’s autumn budget.