London property owners are underpaying £3.1 billion in property taxes relative to home values, whilst households across the rest of England overpay, according to new research from the Resolution Foundation.
The think tank’s report highlights that residential property taxes have become disconnected from current house prices, creating significant regional disparities. The analysis found that 80% of London households benefit from the current system, whilst 85% of households in the North East overpay by an average of £710 annually by 2030-2031.
Tax system under scrutiny
The UK currently raises 3.7% of GDP from property taxes, above the OECD average of 2%. However, the Resolution Foundation argues that Council Tax and Stamp Duty in England are poorly designed, widening regional inequality and discouraging property transactions.
The report describes the system as regressive, largely because Council Tax fails to reflect nearly four decades of house price growth. By the end of the decade, someone living in a £100,000 property will typically pay almost three times as much tax relative to its value as someone in a £1 million property.
Two-thirds of households in England outside London overpay compared with what a proportional property tax would charge, according to the analysis.
Proposed reforms
The Foundation proposes replacing the current system with a proportional property tax of 0.7% of a property’s value, alongside scrapping Stamp Duty on primary residences. The proposal includes a rebate scheme for low-income households and a deferral scheme for asset-rich but cash-poor homeowners.
The report warns against rapid implementation, noting that simply announcing the abolition of Stamp Duty could disrupt the market, create a £15 billion hole in public finances, and provide unearned gains to existing homeowners.
Instead, the think tank recommends the Chancellor establish a roadmap in next month’s Budget, beginning with an updated database of property valuations to support an independent commission. The report suggests freezing Stamp Duty rates and thresholds for the remainder of this Parliament to avoid market destabilisation.
Hannah Aldridge, Senior Research and Policy Analyst at the Resolution Foundation, said: “The UK raises more tax revenue from the homes we live in than most other advanced economies. Unfortunately, our two main housing taxes – Council Tax and Stamp Duty – are terribly designed, grossly unfair and economically harmful.”
She added: “Our housing taxes fall heaviest on those least able to afford them and have turned into a huge £3.1 billion subsidy for those living in London – paid for by households across the rest of England.”
Political challenges
Aldridge acknowledged the political difficulties of reform, noting that debate has focused on potential losers, such as those in gentrified London areas, despite most English households potentially paying less under a reformed system.
The Foundation maintains that whilst housing taxes cannot be reformed immediately, the Chancellor should outline a practical reform pathway in the upcoming Budget.
