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Rachel Reeves has ordered Treasury officials to examine reforms to the UK’s system of property taxation as she seeks ways to raise cash and boost the economy, according to people familiar with the discussions.
Officials are looking at a host of possible ideas for improving and simplifying the country’s tax system, including by overhauling levies on housing, as the chancellor seeks to lift lacklustre GDP growth and address a looming gap in the public finances that could exceed £20bn.
The current stamp duty system, which applies in England and Northern Ireland, is widely criticised by economists because it is charged on transactions, acting as a disincentive to people moving and sapping growth.
The process in the Treasury was at an early stage and no conclusions had been drawn, the people said, but Reeves has told colleagues that she wants tax reform to be a big part of her Autumn Budget.
The Treasury said in a statement: “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 . . . We are committed to keeping taxes for working people as low as possible.”
Reeves is under significant pressure from Labour MPs and some cabinet ministers to increase taxes on wealth, as she seeks to balance the books while sticking to Labour’s election manifesto pledges not to increase income tax, VAT or national insurance.
The Financial Times reported last week that Treasury officials were racing to find tax reforms to boost growth, amid fears that at least £10bn could be wiped off the government’s strained fiscal plan because of a downgrade in productivity forecasts.
Finance ministry figures have downplayed the idea of creating a new “wealth tax” — backed by former Labour leader Lord Neil Kinnock — which they said would be complex and take years to introduce. Business secretary Jonathan Reynolds has described the proposal as “daft”.
But Reeves has not excluded raising or changing existing taxes to boost revenues and has long argued for fundamental reforms to the way Britain taxes property. She has also said any tax reforms should promote “fairness” and protect “working people”.
“Council tax, based on 1991 valuations, is at the very least long overdue a re-evaluation and revision of existing bands — a power which could be devolved to local government to match local needs,” Reeves wrote in her 2018 pamphlet “The Everyday Economy”.
“We should also consider the case for its overhaul and replacement with a property tax, levied on property owners. It would be more equitable and it would place the burden on landlords and not tenants,” added Reeves, who was chair of the House of Commons business committee at the time.
The idea of increasing taxes on property wealth — sometimes dubbed a “mansion tax” — has long been discussed in Labour circles, including the idea of creating new council tax bands for more expensive homes.
Increasing rates of council tax by 50 per cent on the highest-value properties risks a ferocious backlash among some homeowners. Yet it would bring in close to £3.5bn, according to the Institute for Fiscal Studies think-tank, although receipts would flow to local councils rather than government.
Angela Rayner, deputy prime minister, has urged Reeves to consider a range of taxes on the wealthy, including changes to inheritance tax, dividend tax and pension taxation.
Stuart Adam, IFS senior economist, said a list of pro-growth tax reforms would include “the replacement of stamp duty land tax to increase labour mobility”.
But some of the tax reforms “might take longer than the [Office for Budget Responsibility’s] five-year forecast horizon to implement and have their full effect”, he cautioned.
The Guardian reported earlier on Monday that Reeves was looking at proposals by former government adviser Tim Leunig, who suggested reform of council tax and stamp duty in a paper for the centre-right think-tank Onward last year.
His proposals would replace stamp duty land tax with an annual national proportional property tax on houses worth more than £500,000. Council tax could be replaced with a local proportional property tax on houses valued at up to £500,000, with a minimum annual payment of £800.
But Leunig told the FT that it would not be easy for Reeves to replace stamp duty in the Autumn Budget because the change would entail short-term revenue losses as the new system bedded in over a number of years.
“She needs money upfront and she has fiscal rules to hit,” said Leunig, now chief economist at Nesta, a UK innovation charity. “However, reforming this country’s crazy property tax system is a laudable goal that would raise economic growth in the medium term.”