A capital idea

But the debate must go wider than this. Taxation, although complex and controversial, remains one of the most powerful tools available to influence market outcomes, yet debate on housing taxation is muted.

At a time when government is reshaping economic policy in response to the downturn, it is vital that we take the opportunity to consider housing taxation reform.

In order to promote this debate, Shelter has produced a discussion paper looking at the different options for reform.

A starting point is the role housing taxation could play in improving market stability and working to prevent another unsustainable escalation of house prices. Professor Muellbauer from Oxford University has long argued that an annual property tax, where charges are made at a fixed proportion of property value, could have positive macro-economic stabilisation effects. An overhaul of the council tax banding system so it resembled such a tax could have a similar positive effect.

A second key issue is the lack of tenure neutrality in housing taxation policy. More could be done to improve the balance between the tenures so that private renting is a more attractive option and home ownership is not seen as the only tenure of choice.

At present, homeowners don’t pay tax on capital gains, an omission that may have helped fuel house price rises. But private renters receive little advantage. Recent research for Shelter found that private renters struggled more than those in other tenures to pay housing costs. Greater support could be provided to this group through the tax system.

Reform could also help to tackle housing wealth inequalities, which intensified during the boom years. According to the Economic and Social Research Council, wealth inequality in the UK is now the worst in the EU, and housing is the single greatest repository of wealth for UK households. Yet council tax is a highly regressive tax, with those living in a house valued at £1 million in 1991 paying only twice as much as those in a house valued at £70,000. One option would be to link charges more closely to property values so that those with high levels of housing wealth pay a greater share in tax.

There are no solutions with universal support. Any taxation reform is likely to generate winners and losers and there is a clear need for honest and open debate of the options. At a time when the government is looking for ways to raise additional revenue, housing taxation may now be up for review. It is essential though that any reforms are the right ones, and are designed to correct the weaknesses in the system which have contributed to our current housing crisis.

If sound reforms are likely to be unpopular, it is essential to seek support through public engagement and debate. The main recommendations of major reviews of local taxation in England and Scotland have not been implemented, and assessments of public reaction have played a major role in this failure.

But there are some quick wins. For instance, many local authorities continue to offer council tax discounts for those with second and long-term empty homes when we are suffering from a national housing shortage. Scrapping the discounts would provide a much needed revenue boost for the Treasury and provide incentives to reduce the number of second and long term empty homes.

In addition, the rent-a-room scheme should encourage homeowners to let out a room in their house free of tax, thereby increasing the supply of low cost rented accommodation and helping those who are struggling with mortgage costs. However, the threshold is so out of date – set in 1997 at £4,250 a year – that it doesn’t provide the right incentive. The majority of rooms let are now above the threshold, making such households subject to tax on the rental income and completion of self assessment tax forms.

The government has estimated that increasing the thresholds in line with rental inflation, would cost £5 million per year. On this basis we believe the thresholds should increase to £9,000 and be indexed in line with rental inflation thereafter. This could provide an immediate and cost-effective fillip to struggling homeowners and would-be lodgers.

Shelter recognises these quick wins, but is not yet backing any particular reforms. The charity is, though, keen to stimulate debate about the options. The current economic crisis has thrown into sharp relief the inadequacies of the current housing market and the time is ripe to look at the role of taxation.

It is clear others think so, too. The Institute of Fiscal Studies will take a thorough look at housing taxation in its wide ranging Mirrlees Review to be published later this year, and the British Social Housing Foundation reported that housing taxation was one of the top priority areas for review after three days of debate among housing policy experts in June. Housing professionals, economists and politicians must now seize the opportunity and engage in a national policy debate about the future of housing taxation.

Tom Crawshaw is a senior policy officer at Shelter. Rethinking Housing Taxation will be published in November with copies available from the Shelter policy library at http://england.shelter.org.uk/professional_resources/policy_library