Reforming Council Tax

Manchester Lib Dems have launched a local manifesto calling for a reverse of Labour’s 22% Council Tax increase for the least well off in Manchester.

The 2018 report of the APPG on Land Value Capture concluded that: Council Tax …is overdue for replacement with a fairer system of property taxation.

The IPPR report on council tax reform notes:
“…leaving council tax unreformed is becoming ever more unsustainable. Local authorities across the country are increasingly cash strapped as a consequence of government cuts to their core grant funding and limits on their ability to raise funds through council tax and other sources.”

The resolution foundation report suggests council tax reform would leave a large majority of people better off even while raising enough cash to …increase funding for health and social care and reverse government cuts to council tax reduction schemes.

The Joseph Rowntree Foundation 2014 report After the Council Tax: impacts of property tax reform on people, places and house prices found that:
– A progressive property value tax would reduce the size of median gross bills by £279 a year compared to the council tax.
– The bills of almost two-thirds of households would fall by more than 10%, while less than one quarter would see increases of more than 10%.
– A progressive property tax would reduce the gross median bills for the poorest tenth of households by £202, and increase them for the top tenth by £184.
The housing economist Professor Muellbaeur argues “that a radical reform of property taxation makes economic sense and could be more acceptable politically than tinkering at the edges, by adding a few more bands to Council Tax.

ALTER’s proposals under development include:
1. Introducing a land Value Tax along the lines of that of the Australian Capital Territory for residential properties that are not used as principal places of residence including all residential properties owned by a trust or corporation
2. For owner-occupied residential property assessing an LVT (net of a Homeowners allowance based on Local Housing Allowances) and a housing services tax. The housing services tax will be based on the value of direct services delivered to occupiers e.g. rubbish collection and recycling services.
3. Assess a housing services tax for direct services only on tenants occupying residential property.

The tax base is the rental value of land in owner-occupied and let residential accommodation. The land rental value is assessed by the valuation office agency.

An owner-occupied homeowners allowance is provided for against a single main residence equivalent to the local housing allowance set by the Local Authority.

Owner-occupiers over 55 years of age or on benefits may apply to defer payment of the LVT until the property is sold or bequeathed. Inheritors may apply for settlement of deferred tax liabilities in installments over ten years as currently applies to Inheritance tax liabilities arising on property.

Liberal Democrats have put in place policy for reform of business rates. The time has now come to comprehensively tackle council tax reform.

* Joe is a member of Hounslow Liberal Democrats and Chair of ALTER.

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  • I am not sure if the LVT system is any different from the old rate system. The problem lies the cuts of rate support/council tax support grant from the UK government.
    It would be better (and more popular) to replace the current council tax with a Local income tax system as suggested by Charles Kennedy, because such a tax will be based on income actually received. It just means we need to find more effective ways to ensure that tax due is collected.
    As for such a tax being popular then the SNP has the LIT as a policy and they are elected to the Scottish government, while the Lib Dems have fallen to below 10%.
    While I am not saying the LD ditching LIT policy for LVT as solely contributed to the decline it does show lack of real opportunity to make a difference and move to a fairer tax system.

  • I oppose the idea that those over 55 or on benefits who don’t have enough income to afford to pay LVT on residential property have to pay it either when they sell their home or die. The Joseph Rowntree Foundation states in the report linked to in the article, “One key test of fairness is someone’s ability to pay tax from their current income. Taking this as our starting point implies a shift away from property taxation and towards local income tax” and “However, it is practically, politically and ultimately ethically important that a property tax must also have regard to current income”.

    I like the idea of making Council Tax a percentage of the value of residential property with the restoration of the national Council Tax Benefit scheme.

  • David Raw,

    Andy Wightman has done a lot of good work in this area over the years and is an effective representative of his community.

    Scottish Liberal Democrats want to see an end to the council tax as well as local government finance reform where councils have the freedom to raise the majority of the money they spend, in the same way that Holyrood does.

    Working with the SNP on developing a consensus approach to Land reform and Local Government Finance necessitates the Scottish Government setting out what exactly it is prepared to support. If that support is for substantial change, there is every reason to expect that Scottish LibDems will participate with other progressive parties in developing a cross-party position that can be enacted.

  • Katharine Pindar 6th Apr '19 - 9:00am

    This is a valuable review and discussion of a very important subject, thank you, Joe. It seems that our party should be urgently pressing for a progressive property value tax, which should be explicit in our policy, though I am not aware that it is yet so, to replace council tax as soon as revised land valuation can be carried through. The extra burden of council tax increase this month will be a heavy one for the poor, which in the meantime should be tackled by other measures we support.

    I am only doubtful about suggestions of linking a Local Income Tax with a Property Value Tax. Surely the virtue of comprehensive land value taxation is that it is based on the solid foundation of land values, so long as there is built-in revaluation at fixed intervals. But income is a matter which may be in constant flux for individuals, as their jobs and their family circumstances change.

  • Katharine Pindar 6th Apr '19 - 9:01pm

    Thank you for the fascinating and helpful personal example, Joe. I shall print this one off as a useful guide to have by me. Long life to you and your family, and may you always live as happily as you propose! (I remember you laughing in the tea room at Conference, happy man!)

    Only two small doubts. Firstly, this isn’t yet actual party policy, is it, and I wonder why not and hope it may become so. Secondly, this all sounds to work well for secure and stable lives, but for more disorganised, possibly chaotic, anyway mobile lives, with young people going from job to job, one temporary home after another, or people splitting up with partners and changing homes rapidly or even becoming homeless – I do have a faint vision of bureaucratic nightmares developing if income tax is linked to property. Hopefully I’m wrong, there is a major reform needed here.

    (Small request – could you spell my name with a central ‘a’, please, Mr Bourke? :))

  • The problem with Council Tax is actually more to do with the banding system which prevents it being progressive.
    My local authority and the neighbouring one have a substantial difference in Band D rates. Theirs is a lot lower. It’s nothing to do with the relative efficiency of the Councils but the banding system. Most of our housing stock is Band A and B whereas theirs is a more even spread. As and Bs get a reduction from the base rate whereas higher bands get an uplift on the base rate. If your area has few higher band properties you have no progression and the lower bands have to fund it all. There is a Council in London (Wandsworth?) which has the lowest Band D rate. No one pays it because all the properties are in higher bands.
    The national bands cause the problem. Band D should be based on the median value in the area. Half of the properties would pay less and half would pay more so the system would be truly progressive. This could introduced almost overnight because the valuations for each property already exist.
    Areas like mine would see reductions for the lower bands and increases for the higher. Our neighbours would probably also see a smaller reduction for the lower bands too.

  • Katharine, I hope this, as set out above, never becomes party policy.

    It seems ALTER are proposing two taxes, one a tax on property owners and another on property renters.

    I have read in a report somewhere that this council services tax would be paid by everyone – perhaps as a poll tax, i.e. every resident pays the same.

    Turning to the property tax. Joe and ALTER believe that a tax on property cannot be passed on to tenants. I strongly disagree. My disagreement is to do with the return on the investment, if the owner has to pay an extra tax it is possible they will just sell the property. Of course if ALTER and Joe believe that their residential property tax will reduce the value of houses we should be told.

    Turning to the local Housing Allowance (LHA). ALTER and Joe should know it has been frozen for years and no longer is at the level to include 30% of the lowest rents in the area. I hope party policy will be to restore it to the 30% and then at least increase it to 50%, so those on housing benefit receive most of their rent. I would go further and abolish it. If you are poorer enough to receive housing benefit you should not be forced to use part of the inadequate amount the state states you can live on to pay your rent. When you are living in poverty the state should not force you to move home and incur this large expense.

    Turning to the Income Tax Personal Allowance of £12,500. In 2010 party policy was to increase this so no one receiving the Minimum Wage would pay income tax. The minimum wage is £7.70 an hour making £15,015 a year on a 37.5 hour working week. The National Living Wage is £8.21 an hour making £16,009.50 a year. Average earnings for 2018 were £29,574 pa according to the ONS. 60% is the poverty line – £17,744.40.

    Let us all oppose this ALTER policy because we should not be supporting taxing those living in poverty.

    Also we should not be creating a new death tax which only the poor pay – those too poor to pay the residential property tax from their income while alive.

  • Malcolm Todd 7th Apr '19 - 2:39pm

    Michael BG 7th Apr ’19 – 1:38pm

    If I had time and inclination I believe I could show why all your concerns can be addressed without throwing out this policy. I’ll leave that to others and just address your last:
    “we should not be creating a new death tax which only the poor pay”
    This right-wing phrase should not be used in lieu of an argument. The dead do not pay taxes – only the living do. It’s entirely reasonable for those inheriting valuable properties (i.e. windfalls) to pay tax on them.

  • Joseph Bourke 7th Apr '19 - 4:11pm

    Michael BG,

    Many councils already levy a charge for removal of garden waste and large bulk items. The basis for the council services tax can be a fixed charge with waivers for low income households or a low % of the rental value of buildings only (the LVT would be paid by the Landowner).
    Landlords have faced a number of tax-hikes in recent years. New rules mean that relief for interest is being restricted, purchasers of second and subsequent residential homes now face a 3% SDLT supplement, and where a capital gain relates to a residential property, a higher rate of capital gains tax applies than for other gains. Despite these tax increases rental prices continue to be subdued and below the rate of consumer price inflation across much of the UK, as reflected by the latest ONS survey data This reflects how rents are determined – by the level of demand which is depenent on the level of disposable income in the local area.
    Students pay no council tax. When a Landlord is assessed to LVT, it does not mean he can increase rents above the market rate. He can only increase rents where the tenant is paying less in council tax than previously. This will not be the case for students, low income households that benefit from council tax reduction and tenants in housing in multiple occupation. There may be some increases for other tenants. but they will be paying no more than the previous rent and council tax combined.
    The LVT housing allowance can be set at any proprtion of the Local Housing Allowance used for housing benefit. Homeowners pay council tax now (and national insurance on earnings over £8,424 per year). The majority of owner-occupier homeowners will see tax reductions As to creating a new death tax which only the poor pay – tenants cannot incur debts secured on property they do not own – the council services tax is paid or waived. Homeowners in lower value rental properties will not be assessed at all. Those occupying higher value properties have the option to defer. If the beneciaries of the estate do not wish to sell the property they inherit and choose to rent it out or occupy it themselves instead, they have the option to pay property tax debts in instalments over ten years (as is the case with most property tax systems around the world).

  • @Joseph Bourke

    Some questions.

    1. In your example you use the national income tax rates. Do you propose rates that vary locally? If not there is very little scope for local authorities to have varying amounts of tax and services.

    2. I assume there has to be some equalisation mechanism across local authorities. But part of the reason for property taxes is to encourage local authorities to invest in infrastructure etc. that will improve them and that destroys the incentive.

    3. Unless I am misunderstanding this – it means the possibility of very high rates of marginal tax. Earn £1 over the personal allowance and you are clobbered for the WHOLE of your liability. And would also kick in at the higher rate of tax. I appreciate that those on low incomes are likely to live in lower value houses but it is far from a clear relationship. It also strikes me that it might be particularly unfair on categories such as grown up children living with their parent(s) who will have to pay a half or a third of the liability.

    4. Again as I understand it suffers from the regressive nature of the council tax – in that the percentage you pay goes down as your income goes down for people living in the same value property – with very large percentage at low incomes and vice versa. It improves it a bit because it doesn’t have the bands.

    5. As I understand it there could be large disparity in the amount of tax paid in different areas. Now this MIGHT be partly “fair” as they are benefitting from higher property values but I am not sure that it is a vote winner.

    6. How much is the services charge element? There is a difference between a small charge and a larger one. In general I believe that taxes for general services should be based on the ability to pay. And conversely flat charges should be avoidable if I choose – I don’t have to use the garden waste service, watch live TV, drive a car etc. If large we are back to the poll tax (or rates) if small it would be seen that tenants (at least) directly were not paying anything.

    7. How much would it be for landlords – 20%, 40% or some other rate? While there is an argument over who actually pays tax if 40% then they will be effectively paying a higher rate, if lower landlords might be seen to be benefitting (depending on your viewpoint!)

    8. I am less than convinced that an ANNUAL charge as supposed to capital gains tax etc. will not be passed on to tenants. What evidence is there on this?

  • Joseph Bourke 7th Apr '19 - 10:57pm

    Michael 1,

    1. Most local authorities will be able to fund their budgets entirely from 100% business rates retention and property taxes on residential property. Some more deprived authorities will need central government funding support on top of local tax collections.

    2. The purpose of using natiional tax rates is to allow council tax to be collected by HMRC through the PAYE/self-assessment tax return systems. Equalisation may occur across combined uniatary authorities e.g, Greater London.

    3. If your taxable income is £1 over the alowance you will pay tax on £1 only. The tax is assessed on rental value of the property less owners homeowners allowance. Grown up children living with their parent(s) will not be assessed unless they have an ownership share in the property and its notional rental income.

    4. Studies find a high degree of correlation between ownership of higher value properties and higher incomes. A homeowners allowance provides a tax free allowance for property taxes in much the same way that a personal allowance provides a tax free allowance for income taxes.

    5, The homowners allowance is based on local area rents in the bottom 30%. These regional variances seek to ensure that property taxes are paid principally by Landlords and owner-occupiers in the top 70% of properties in a local authority area.

    6. The tenants councils service charge is principally to defray the costs of direct servics provided by councils such as waste collecion and recycling. I believe these constitute aroud 3% of couciil budgets. Assuming 5% of existing council tax as a charge this can be based on a small flat chargr or a low % of property rental values (excluding land values).

    7. Landlords already pay tax at marginal income tax rates on their profits from letting. The LVT charge would be based on the national domestic rates % (currently 50.4%) on the Land rental value only. Rental properties with a high component of land value would pay higher assessments than those with a greater component of building value. The LVT would be deducted from the calculation of profits for income tax or corporation tax purposes in the same way that business rates are now.

    8. Two landlords with the exact same property in the same location will charge the the maximum rent the market will bear. regardless of what their individual tax situation is.

  • @ Malcolm Todd
    “all your concerns can be addressed without throwing out this policy”
    “It’s entirely reasonable for those inheriting valuable properties (i.e. windfalls) to pay tax on them”.

    Indeed, the policy could be modified to address all my concerns.

    Firstly, such a policy would be attacked with the phrase I used. Secondly, you have missed my point. A wealthy owner of a residential property would pay the residential property tax out of their adequate income and those who inherit the residential property would not pay any “death tax”. However, those who inherit the residential property of someone who laced the income to pay the residential property tax will have to pay this new “death tax”. The inheritors are not being treated equally and the basis for them not being treated equally is the income of the dead owner of the property.

    Please do not confuse my objection to this aspect of the ALTER policy with any opposition to the party’s new policy on our reform to inheritance and gift taxes.

    @ Joseph Bourke

    You should not assume that local authorities would provide “waivers” on your new council services tax as since 2012 only 37 councils out of 326 had not reduced the reductions for people who once would have benefited from the national Council Tax Benefit scheme (April 2017 figures). By 2017 2 million families had been adversely affected by this (HOC briefing paper 6672). This new council services tax will be attacked as a new poll tax.

    I note that the ONS figures are “experimental” (subject to revisions if improvements in the methodology are identified). The latest figures are 1.5% rise excluding London (February 2019). UK rental prices have increased by 7% since January 2015.

    I note you believe that people living in poverty should pay this residential tax either when they die or when they move house.

    I note you have made an assertion for your answer to question 8 from Michael 1. I can do that too. When costs increase prices normally go up to cover the increased costs.

    A much simpler policy would be to reform Council Tax and take up the idea in the Mirrlees Review and charge 6% on the value of all residential property and restore the national Council Tax Benefit scheme for the poorest in society. The Council Tax is “regressive relative to its base — the more the house is worth, the less as a proportion of the value is paid in council tax” (page 382).

  • Katharine Pindar 8th Apr '19 - 9:13am

    Council tax has just gone up considerably, imposing another burden on the poorest. We need to have a policy to correct this unfair system. Let us not let the ideal be the enemy of the good. The policy of Land Value Taxation does seem the most constructive way forward, and to have a housing services tax with enforced waivers for the poorest sounds fair enough to me.
    Unfairness in taxation should surely be an ill which our party demands remedies for. We protested when the Budget tax reductions benefited the well-off far more than the low-income voters. The next Government should have a radical change of direction in correcting the inequalities perpetuated by our taxation.

  • Peter Martin 8th Apr '19 - 9:29am

    @ JoeB,

    So you want to make taxation fairer? OK I know you think a LDV is a cure all, but I doubt it.

    Consider the case of two families living side by side on similar incomes in similar properties. One family is an owner occupier. The other is a tenant. So the net difference in their annual incomes will likely be something in excess of £10,000 p.a. This is even before we factor in any increase in wealth due to the steep rise in prices we’ve seen over the years.

    So how to level the playing field? How about introducing an income tax on the owner occupier on the imputed £10,000 pa?

    Hasn’t this been done before as a so-called Schedule A tax?

    Of course, the snag is that it would lead to electoral disaster!

  • Peter Martin 8th Apr '19 - 9:35am

    An LDV as a cure all? I was probably right in saying it wasn’t but I really meant a LVT ! 😉

  • Katharine

    Council Tax goes up because costs increase and the government has reduced the amount they give to councils. If the national Council Tax Benefit scheme was restored the poorest in society would be protected from these increases, even if at a much lower level than poor pensioners.

    We should not be advocating a new poll tax called housing services tax.

    The most important thing we need to do about Council Tax is the restore the national Council Tax Benefit scheme. Then we should introduce more bands as set out in the APPG report and the next step is to remove its regressive nature by turning it into a flat rate on the value of residential property. A rate of 6% was suggested by Mirrlees which makes those with band A to C better off and those with higher bands than D worse off.

    As we already have radical proposals for inheritance tax the last thing we need is another death tax to apply only to those people who inherit from people who lacked enough income to pay the tax when alive.

  • Joseph Bourke 8th Apr '19 - 2:34pm

    Polls tell us that2/3rds of people in the UK would accept higher taxation to fund increased levels of public service provision This is a similar level of support to that for the Mansion tax proposals floted by Libdems and Labour a few years back
    There is wide agreement that the council tax has become increasingly regressive and no longer fit for purpose, if it ever was. Making it more progressive is a transitional measure to wider based reforms that would see the majority of local council budgets funded by land and property taxes on Landlords renting commercial and residential property and owner-occupiers of higher value property in their local area (with most owner-occupiers seeing reductions in their council tax bills).
    There are at least two options for a small services council services charge. A flat rate charge for rubbish collection services etc (perhaps in the range of £5 to £10 per month) with waivers in accordance with local authority policy or a % of rental values levied on properties in the upper 70% of rental value.
    Council tax was frozen for six/seven years from 2010 during a time when both costs were increasing and central government funding reducing. Now many councils have reached the point where they can no longer sustain the services that so many depend on. This is where the focus of party policy needs to be – properly funding local authorities with taxes raised locally to finance investment and spending decisions for which local councillors are democraticaly accountable.

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