Council tax reform – what are the options?

Our new Prime Minister first suggested that he might change the Labour Party policy on Council Tax reform during his election campaign for the Makerfield parliamentary seat in June. Whilst on the stump, Andy Burnham made it clear that if elected he would campaign for a fairer method of raising local taxes.

Council tax, introduced in 1993, replaced the short-lived Community Charge (aka the “poll tax”), which in turn had replaced domestic rates. Each property is assigned one of eight bands in England and Scotland (A to H), As it’s based on the value of the property; the higher the value of the property, the higher the amount of tax levied irrespective of the number of inhabitants at the property, although a 25% reduction can be claimed by individuals living alone.

Why change the system?

The old adage of ‘If it ain’t broke, don’t fix it’ is looking increasingly out of date these days, especially at the top and bottom of the range of bands. So, our new PM has decided that a change in the way local property taxes are assessed is well overdue. Pretty much everyone agrees with him that the present system is no longer fit for purpose, the problem is that nobody can agree on what to replace it with.

Many MPs and various campaigners have been calling on the Government to reform council tax and Andy Burnham has said his Government faces “big decisions” about council tax, as he believes the current system to be inherently unfair, recently saying “There are households in Greater Manchester disproportionately paying a much higher council tax than people living in much larger homes in London”.

And it isn’t just the PM speaking out, many Labour MP’s have also done so recently, such as Chris Webb, the MP for Blackpool South, who said last month, “It “cannot be right” that my constituents pay more than the owner of a £10m mansion in Mayfair”. He went on to point out that council tax bands have not been updated since they were set using property values from April 1991.

How much does Council tax raise?

The OBR (Office for Budget Responsibility) has forecast that the current system of Council tax will raise £51 bn in England in 2025-26, which is broadly equivalent to approximately £1,770 per household. The system is calculated on valuations and bands set nationally, based on data held by the Valuation Office Agency. However, the money is collected and spent locally on the myriad of basic local council services (waste collection, street lighting etcetera), but also on social care, which devours the bulk of the tax collected.

Average house prices in London and large swathes of the south-east, have risen more than sixfold since 1993, as opposed to only threefold in the north of England, according to the Institute for Fiscal Studies (IFS). The campaign group Fairer Share found that nine of the ten parliamentary constituencies with the highest council tax burden relative to property value are in the North. So, what are the realistic options for replacing council tax?

There are four possible options:

• Ditch Council tax and fund local services from direct taxation: Whilst this suggestion has the merit of being loosely based on people’s ability to pay, it is effectively a non-starter as it will require a significant raising of direct taxes, such as income tax and National Insurance and is likely to prove very unpopular.
  
  

• Annual charge based on current values: This suggestion by the Fairer Share campaign group, which has significant parliamentary backing, is to scrap both council tax and stamp duty and replace them with a flat rate annual charge on a home’s current value, which they have suggested should be 0.48% . Under this system, a 4-bed house in London worth £750,000 would pay around £3,600 a year, whilst a £180,000 terraced house in Blackburn would only pay £864.
  
  

• A land value tax: This is the model that the PM appears to favour. It would charge owners only on the value of the land a property sits on, rather than the building itself. Burnham has said, “Council tax is a tax on the aspirations of young people trying to put down roots, which a tax of this sort would help to address.” Supporters of the measure argue that this model would not penalise owners for improving their homes, since the charge is based on land value alone.
  
  

• Property revaluation: This more modest option modelled by the IFS would leave the existing bands largely in place but update the values underpinning them. The IFS argues that this is the bare minimum of reform needed and state that most bills would increase or decrease by less than 10%. They have however admitted that larger homes in the leafy suburbs are likely to see much sharper rises of up to 50%.

Since he became PM, Andy Burnham has not openly endorsed a specific model, and any change would need to sit within Labour’s 2024 manifesto, which gives him some flexibility as the manifesto did not address council tax directly. Lord Blunkett, one of Burnham’s closest allies, has warned that a land value tax could be “politically problematic” is it would create significant winners and losers across the housing market.

The final word must go to our new Prime Minister who told Laura Kuensberg earlier this month that “It will not happen and cannot happen in the immediate future,” When pressed by her on the subject he agreed that a wider public consultation would be needed, with any changes unlikely before the next General election.

Accountant’s view

As our new wonder kid in number10 Downing Street couldn’t stop talking about Council Tax reform in his election campaign and its immediate aftermath, it now seems that reality has most definitely kicked in and he’s backpedalling rapidly.

Unfortunately for the PM, he is well aware that pretty much every taxpayer is unhappy with the present system and when you factor in that Council Tax is at historically high rates, plus the cost of social care is ballooning, he knows that he can’t simply cannot kick this particular can down the road for much longer.