The UK’s property tax system is widely viewed as both inefficient and unfair, contributing significantly to the country's entrenched housing crisis and sluggish economic growth. Stamp duty, the principal transaction tax on property purchases, is at the heart of these issues. Charged as a lump sum at the point of purchase, stamp duty creates a strong disincentive for homeowners to move, inhibiting labour mobility and preventing individuals and families from finding homes that better suit their size or location needs. This inefficiency is compounded by the broader economic context of high interest rates and sluggish growth, leading to near-record lows in property transactions.

Current housing dynamics illustrate the scale of the problem. More than a third of English households live in government-defined under-occupied homes, with at least two spare bedrooms primarily owned by the baby-boomer generation now entering retirement. Reforming stamp duty to encourage downsizing could unlock this underused stock, potentially boosting productivity and economic growth while alleviating some pressure in the housing market. However, property tax cuts have historically driven demand and thus house prices higher, often negating benefits for first-time buyers by pricing them out, as seen with previous help-to-buy schemes.

Political parties are divided on how best to tackle these challenges. The Conservative Party, under opposition leader Kemi Badenoch, has pledged to abolish stamp duty on primary residences, a move designed to stimulate market activity by reducing transaction costs. Meanwhile, the Reform UK party proposes more modest stamp duty reductions alongside cuts to inheritance tax and reinstatement of some landlord tax reliefs. Critics argue such policies risk inflating house prices further, disproportionately benefiting owners in London and the prosperous south-east, where homes are more expensive and transactions more frequent, while doing little to help less affluent buyers elsewhere. They also undermine incentives for older homeowners to downsize, which is crucial for freeing up family-sized houses.

The system’s unfairness extends to council tax, which has effectively become a regressive wealth tax on low- and middle-income homeowners. This tax, banded based on property values last assessed in 1991 and never updated since, means many higher-value properties pay proportionately less tax than modest homes in less affluent areas. For instance, some multimillion-pound mansions in central London incur lower council tax bills than smaller homes in northern England. This distortion aggravated by the absence of a revaluation means local revenues and tax burdens are badly mismatched geographically and financially.

Further unfairness arises because the property tax system heavily favours homeowners over renters and real estate investment over other asset classes. Unlike some countries like the Netherlands, which levy taxes on the ‘imputed rent’ homeowners benefit from, the UK provides 100% capital gains tax relief on the sale of primary residences. This relief amounted to £31.5 billion in 2023-24, making it the largest single tax break nationally, equivalent to nearly 1.15% of GDP—the size of budgets for multiple major government departments combined. Such policies skew investment towards property instead of businesses or capital markets, exacerbating the country’s long-standing productivity stagnation.

Reforming this tangled system requires a bold, comprehensive approach rather than piecemeal fixes. There is growing consensus among economists across the political spectrum for replacing the current stamp duty and council tax regimes with an annual proportional property tax (PPT) on market values or land values at a rate around 0.5%. This would correct inefficiencies by taxing property wealth annually, rather than discouraging movement through lump-sum taxes at purchase, while also addressing fairness by aligning tax burdens more closely to actual wealth and local public service needs. Campaign groups like Fairer Share have demonstrated such reform could benefit three-quarters of the population and deliver particular gains for traditionally Labour-supporting areas in the so-called “red wall.”

However, reform presents challenges, notably avoiding a significant fiscal shock to local government finances reliant on council tax revenues. A recent proposal from former government adviser Tim Leunig suggests giving councils control over revenues from properties valued under £500,000 with a minimum payment floor, while central government would collect higher rates on top-end homes to manage redistribution. Rumours suggest the Treasury is considering such a scheme, though political risk is substantial given the media hostility towards new property taxes.

Meanwhile, industry voices have joined calls for change with nuance. Bellway CEO Jason Honeyman advocates eliminating stamp duty specifically for first-time buyers combined with deposit assistance schemes to revive demand and support younger buyers lacking financial family backing. This contrasts with some Conservative proposals that aim to abolish stamp duty more broadly, raising concerns about inflating prices further without targeted support. The government has also announced increases in stamp duty surcharges on second homes to fund first-time buyer programmes, reflecting the complex balancing act between raising revenue and supporting affordability.

The Institute for Fiscal Studies (IFS) and think tanks like the Adam Smith Institute have been vocally critical of stamp duty, describing it as economically harmful—a tax that impedes the efficient allocation of property and stifles economic mobility. The IFS argues abolishing stamp duty would help address labour market inefficiencies by encouraging movement and downsizing, similar to academic perspectives on the broader need to rebalance property taxation away from transactional levies to more stable, annual taxes.

For the Labour Party, embracing radical property tax reform could align with core goals to reduce wealth inequality, address regional disparities, resolve the housing crisis, and foster economic growth. It would mark a decisive break from incrementalism, putting economic efficiency and fairness at the heart of housing policy while challenging entrenched privilege within the property market. The stakes are high, but the potential gains for the UK’s economy and society are substantial.

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Source: Noah Wire Services