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Property Taxes in London

Volume 594: debated on Tuesday 24 March 2015

The so-called mansion tax is a big issue and will continue to be so in London for the next 44 days, in the run-up to the general election. It is not enough for those of us who are against what is proposed simply to oppose it. We—mainly Conservative Members—need to be on the front foot and have our own proposals for a property tax. That is what I want to put forward in this short debate.

As the new year dawned, the right hon. Member for East Renfrewshire (Mr Murphy) announced that the Labour party would

“tax houses in London and the South East to pay for 1,000 new nurses in the Scottish NHS.”

Although he later clarified that he was referring only to Scotland’s share of any new mansion tax, the coupling of Labour’s mansion tax policy to its battle to the death with the Scottish National party, north of the border, over NHS staffing was doubtless deliberate. The Scottish Labour leader knew only too well that his focus on two targets of Scottish resentment, notionally London and the well-off, would play wonderfully with his audience.

Alas, such messages resonate south of the border, as well. The notion of London and Londoners as some sort of cash cow able to fund all manner of policy promises has gained widespread traction in recent years. The capital city apparently sparkles with success and is brimful of confidence at a time when other parts of our kingdom are struggling. Increasingly people speak of London’s alienation from the rest of the UK, as the metropolis gobbles talent and makes a compelling case for its ever-increasing infrastructure budgets.

Meanwhile, the issue of housing in London itself has become toxic. Boosted by the weakness of sterling and the perception of the UK as a safe haven, foreign money has flooded into England’s prime housing market. As the international enclave expands in the central London boroughs, prices are driven up in the outer suburbs. Meanwhile, rapid population growth, a lack of housing supply and the difficulty of saving for a vast deposit, alongside boosted prices that were already artificially affected by low interest rates and Government programmes, have made it tough even for professionals to enter the property market in our capital city.

As a result, a passionate debate now rages about the possible imposition of a mansion tax, as a means of addressing the resentment felt both by the rest of the country towards its capital and by those Londoners excluded from the apparent property bonanza. Both the Labour party and the Liberal Democrats have made it clear that they wish to push ahead with such a levy on all properties valued at over £2 million. I appreciate that in a globally mobile world it is increasingly difficult to raise tax income, and so fixed assets such as real estate will inevitably tend to attract higher rates of taxation. But in spite of those parties’ apparent concern for fairness, as they would put it, neither has been receptive to the genuine worries of many of those hit hardest by their plans: people who happen to reside in homes whose value has inflated in recent decades to a level that bears no relation to the household’s ability to stump up large annual cash sums in a mansion-tax type levy—in other words, the asset rich but cash poor.

I suspect a hefty annual mansion tax would drive greater numbers of Londoners from their homes, vacating even more prime central property for the global super-rich. As such, it should be vigorously opposed. Undeniably, however, my own Conservative party risks being left behind in the public debate on the issue if it fails adequately to address the resentments behind the mansion tax’s apparent popularity. The Chancellor has already rapidly raised rates of stamp duty, particularly for homes purchased by companies, non-doms and offshore vehicles. Local authorities in London have also been given the power to remove most exemptions from council tax for empty homes and second homes via the Local Government Finance Act 2012. But the coalition is yet to grasp the nettle on council tax, and it is that prospect that I will raise with the Minister today.

As the Minister will know, council tax was introduced in April 1993 as the primary source of collecting income from local residents by local authorities, as a hybrid personal and property imposition. It came hot on the heels of the ill-fated and short-lived community charge—better known as the poll tax—which had itself replaced domestic rates in England in the spring of 1990. As we know, the levy for councils in England is calculated by allocating a dwelling to one of eight bands, A to H. The allocation is made on the basis of a property’s assumed capital value. But that assumption is based on prices as they stood on 1 April 1991—almost a quarter of a century ago. Newly constructed properties are also assigned a nominal 1991 value, albeit one reflecting national rather than localised variations in value over the past 24 years.

The tax is not even particularly proportionate to property values, as the same amount is levied on all homes valued at over £320,000 at 1991 prices, which is the national band H. That means that about half of all houses in the capital are now placed in the same council tax band, even though their size, location and value are vastly different. A Knightsbridge oligarch, for instance, is paying £1,353.48 in council tax on a £60 million home, exactly the same amount as that levied on properties worth one thirtieth of that sum—properties that would fall within the mansion tax band.

If the current outdated system of valuation seems ludicrous, it can be explained by a concern among politicians that the process and time taken for revaluation would be contentious, difficult and potentially costly to voters. However, there is a solution that is neither overly complex nor anything like as painful as a mansion tax. More important still, it could have a big upside when it comes to the provision of affordable housing.

My central London constituency has one of the highest concentrations of high-value properties anywhere in the country, so my constituents would be particularly vulnerable to the imposition of a new blanket mansion tax along the lines proposed. Indeed, over the past six or seven months I have been bombarded with letters telling me that, in spite of my vigorous opposition to a mansion tax, I should be doing more to stop my political opponents from even talking about one. Many of my constituents simply do not have the thousands of pounds in cash needed each year to pay a mansion tax levied in addition to council tax. They are also concerned that any additional income would go straight to central Government and be distributed elsewhere, along the lines of the promise of the right hon. Member for East Renfrewshire to pay for Scottish nurses with Londoners’ money.

Like me, my right hon. Friend has received letters from people who have lived in their houses for very many years, many of whom are now widowed, who face the prospect of being forced out of their homes by this relatively iniquitous tax. It takes no account of ability to pay; it works from a snapshot. Its unfairness is regional and also generational.

My hon. Friend is absolutely right. We have all had heartfelt letters from elderly folk in particular who are worried sick about the prospect. As I say, the perverse impact would be that they would be driven out of their homes and those homes would be more likely to end up in the hands of the very oligarchs that the mansion tax is supposed to prevent from monopolising the London property market.

Many of my correspondents recognise that the current structure of council tax requires urgent updating and would be receptive to the imposition of additional bands to recognise differential property values—something that would, again, disproportionately penalise London. Currently, all banding ratios are set down in statute, but the Government could allow local authorities to set their own for band H and above, with bands A to G remaining at their existing statutory ratios. A ceiling could be set so that council tax would always be limited to, for example, a band J of three times the existing band H charge, to ensure that it would not become a mansion tax by the back door.

The City of Westminster might not be the most typical of local authorities, but obviously it is close to my heart. In that central London borough, a band H property is now likely to be worth more than £2 million; there are just under 15,000 of such homes. However, there is a vast difference between a £2 million flat in Pimlico and a home valued at £60 million in One Hyde Park in Knightsbridge.

Local authorities could be empowered to impose additional bands—for example, a band H for prime properties worth between £2 million and £5 million, a band I for intermediate prime properties worth between £5 million and £15 million and a band J for super-prime properties worth more than £15 million. Crucially, the Government ought to ensure that all additional council tax or prime property tax income over and above the existing band structure is retained by the local authority on the proviso that it is earmarked exclusively for affordable housing in the area. That positive and highly localised proposal could be a far more eye-catching and exciting way of countering the envy-driven mansion tax and tackling perceived housing inequality. It would also chime perfectly with the spirit of the age. As I mentioned earlier, the Government have moved towards a system that gives local authorities discretion over empty property taxes, so we are already empowering local authorities to apply local circumstances to the levying elements of council tax.

Strong currents are pushing us towards a further devolution of central powers. London, in particular, would surely be able to make a compelling case for localised revenue raising—particularly if Scotland becomes ever more autonomous. Meanwhile, the enormous and growing pressure on London’s housing supply will lead to an ever stronger case being made for the money raised in the capital from its prime housing stock to be retained in the city for the provision of affordable housing.

Politically, there is a compelling case to make. Residents in prime central houses are paying about a third of what they were paying in rates, compared with even the 1980s, while the burden for those further down the scale has increased proportionally. Reformers should take up this opportunity with relish. However, the proposal will work only if the additional ring-fenced income is disregarded by central Government when determining a local authority’s funding stream, to prevent councils from being financially disadvantaged by the use of the proposed new bands. That could be achieved through a relatively minor revision to the Government’s annual tax base return—CTB1—to show that each local authority’s tax base calculation for bands H, I and J are along the lines I have proposed and are based on the existing 18/9 band H ratio. That would ensure that the local authority funding streams calculated using the CTB1 tax base data remain unaffected. It would be a relatively straightforward change, as far as the Minister’s Department is concerned.

Although my proposal avoids the complexity of a fully fledged revaluation, it should nevertheless be noted that such complexity is fast reducing with the rise of online property sites, which are able to provide pretty accurate historical and current market assessments. Would it really be that difficult to establish a system of self-assessment, such as the one in France, where there is a wealth tax whereby the worth of the equity of a property is submitted on an annual basis and can be challenged by the town hall if it is thought not to be an accurate assessment of market value?

My party must never give in to the politics of envy and to class war rhetoric, but the wide support for a mansion tax among some fair-minded people is, in part, a reflection of a collective failure to grasp the nettle by comprehensively reviewing property taxes. However, the mansion tax, as proposed by the other two main political parties in England, must not go ahead. It is mooted as fair—whatever that really means—but the real, practical concerns of people in my constituency are simply disregarded as the bleating of the cosseted rich, despite its threatening to ruin many. That applies to Wimbledon as much as it does to the Cities of London and Westminster. My hon. Friend the Member for Wimbledon (Stephen Hammond) and I are used to heartfelt pleas from elderly constituents, many of whom are sickened with worry about this matter.

The time is ripe to tackle the outdated system of council tax in a way that is fairer and allows for genuine local discretion. Incremental targeting of the highest-value properties could be accompanied by a new localised council tax support scheme that would allow specific instances of individual hardship to be addressed.

It is widely reported that our capital city may just have equalled its peak population, and it is anticipated that 100,000 people per year will be added to this great metropolis. The capital urgently needs more housing of all types, but particularly more affordable housing. If the money from London’s additional council tax bands were to be reinvested directly into the communities whence it came, we could begin to provide the homes that the next generation of Londoners desperately needs. I implore the Minister to look in detail at these issues so the electorate can be presented with a real choice on these matters on 7 May.

It is a pleasure to serve under your chairmanship, Mr Caton. I welcome the constructive input of my right hon. Friend the Member for Cities of London and Westminster (Mark Field) and his fresh perspective on the topic of council tax. It is clear that a lot of work has gone into developing his ideas, and I commend him for his thoughtful approach. I also commend the London borough of Westminster for having kept council tax levels at the same rate for the past four years. The banding system is set nationally, but council tax levels are set locally, and Westminster’s approach has helped to keep living costs down for hard-working residents.

There are many matters about which my right hon. Friend and I agree. We agree that a mansion tax is not the answer, whatever the question. It would be complex to introduce, involve the re-evaluation of many homes and raise fairness issues about the ability of those liable to pay the tax. We have no intention of introducing a mansion tax.

My right hon. Friend and I also agree about the importance of affordable homes, which is why, despite the fiscal constraints, we have secured capital resources for affordable housing. Almost 217,000 affordable homes have been delivered in England since April 2010. Our affordable homes programme is on track to deliver another 170,000 affordable homes between 2011 and 2015. More than 144,000 homes have already been delivered under the programme.

The Government are now seeking to accelerate the increase in the number of affordable homes. By the end of the next Parliament, we should see 275,000 additional affordable homes built with £38 billion of public and private investment. That means that we will have built more new affordable homes than during the equivalent period in the past 20 years. We have introduced a range of measures to get Britain building again, to fix the broken housing market and to help hard-working people get the homes they want.

We recognise that the process of devolution is positive and necessary, with regard to local government finance. Indeed, the Government have devolved significant responsibility to local authorities, and the reforms are still bedding in. The affordable homes programme, which the Mayor has undertaken, comes with £1 billion of devolved money. There is a real commitment to work with boroughs and councils in London to deliver that package of housing.

My right hon. Friend and I also agree that the re-evaluation process is expensive and complex. However, we differ in that the Government do not support the introduction of a higher council tax band. Council tax is not a wealth tax but a charge for the use of local services. The current banding system reflects the fact that larger homes make a slightly greater use of local services, but it is intentionally not a poll tax or a domestic tax.

I accept that Westminster is relatively exceptional, but the £320,000 limit means that more than half the properties are in the same band, which suggests that the banding system is not working well. Although Westminster is an exception in that regard, I suspect that it is not the only area in London or the south-east in which a significantly disproportionate number of properties are in either of the top two bands.

I recognise the tensions associated with this, but as a former Housing Minister, I have to respond to the idea of taxing people who live in certain houses. As both my right hon. Friend and my hon. Friend the Member for Wimbledon (Stephen Hammond) have pointed out, the fact that a person lives in a particular house may not mean that they are cash-rich as a consequence. A set of circumstances may have led to their owning the house, and simply placing a greater tax burden on those individuals does not necessarily produce more affordable homes.

Will the Minister follow that line of logic? Even if he is not prepared to accept part of what my right hon. Friend the Member for Cities of London and Westminster (Mark Field) said, perhaps he will be prepared to look at the structure of banding regionally, to give a greater reflection of the differentials in house prices in different parts of the country. The current band structure clearly cannot reflect that, so the case for regional banding becomes even stronger.

I respect my hon. Friend’s comments, but as a Conservative who has had many conversations about the word “regional”, I can tell him that that word does not sit comfortably in the Department at this time. I assure him that we will not be having a “regional” conversation about taxation.

The Government have already taken strong action against owners of high-value property who seek to avoid paying their fair share of tax. We have introduced a number of measures, including the 15% rate of stamp duty land tax, the annual tax on enveloped dwellings, and the extensions to capital gains tax, which target those individuals who “envelope” residential properties by owning or purchasing them through certain non-natural persons, such as companies. Those measures are proving effective. For instance, in its first year of operation—2013-14—the annual tax on enveloped dwellings raised about five times more than the original £20 million forecast. It is expected to raise £110 million in 2014-15.

Two important phrases came out of what my right hon. Friend and hon. Friend said: the “politics of envy” and the “class warfare” element. Both the measures that we have introduced to pursue the individuals who are avoiding tax are about making sure that people who have money and should pay tax do so. That argument is different from the one that the Labour party is making, which instils the politics of envy and class warfare against those who have achieved, rather than supporting those who are ambitious and seek to be successful in life. That is at our root as Conservatives: we will support the individual who wants to aspire to own something, rather than punishing somebody who has achieved those goals and ambitions.

The admirable achievements of successful local authorities, such as that of my right hon. Friend the Member for Cities of London and Westminster, demonstrate the effectiveness of the current council tax system. We believe that the implementation of higher bands would unbalance that system and alter the key principles of council tax, which, after all, is not a wealth tax. Extra revenue has been raised, however, by the taxes placed and targeted on owners of high-value property who seek to avoid paying their share of tax, as I have said. Furthermore, our innovative measures and programmes and a range of products that will meet a range of housing needs, with support from councils, housing associations and the private sector, will continue to deliver and build on the affordable homes programme.

My right hon. Friend raised the issue of foreign investment, and I appreciate that a significant number of people come to this great international city and invest. They have done so for many years, but sometimes people can distort the sort of comments that he made. In my time as Housing Minister, I saw many acres of coverage discussing the issue in many supplements. We should recognise that we are open-minded about people wanting to come to this city and invest in our infrastructure and housing.

Before the Minister concludes, I would like to put it on the record that I very much support the free movement of capital; it is a positive thing, broadly, for London and for the UK as a whole. That said, there has been controversy about the so-called dark lights in large bits of Kensington, Knightsbridge and Belgravia, although I think that is exaggerated to some extent. Quite a lot of the properties that are purchased are rented out to UK nationals or other London residents. A big sea change would be needed if we were somehow to discourage the free movement of capital, and although that might open up matters a bit in the London property market, it could have a very detrimental effect on much of the rest of the British economy.

I completely recognise the huge support for inward investment in the country that my right hon. Friend has promoted and encouraged, and he will continue to, I am sure.

We should put on the record the fact that in 2013, the Bank of England estimated that foreign buyers represented some 3% of the total residential property transactions in London. Savills said, again in 2013, that the current level of sales to overseas buyers is the same proportionately now as it was in 1990. It is important to put things in context, so that individuals do not race away with another idea that some of the issues associated with affordable housing are about foreign people coming to our country. Foreign people are coming to our country and investing in our infrastructure and our housing.

In conclusion, I genuinely appreciate the time taken on this issue by my right hon. Friend and hon. Friend. I am sure that my right hon. Friend the Member for Cities of London and Westminster will make representations to other parts of Government about his ideas. I reassure him that, from my time as Housing Minister I know that the Mayor of London takes the issue of affordable housing extremely seriously. I am sure that through working with partners such as Westminster and through the leadership that my right hon. Friend has taken on this issue, we can begin to address this need—and there is a huge need—for both affordable and private sector quality houses for the people of London.

Question put and agreed to.

Sitting adjourned.