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Shake-up of property tax needed to fund social care

A new property tax set more in line with property value could raise enough money to solve the social care problem, says former senior civil servant Matthew Bailes

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Shake-up of property tax needed to fund social care, by Matthew Bailes #ukhousing

I must admit a bit of me feels quite sorry for Theresa May, and not just because she developed a cough at the wrong time.

No prime minister since Churchill has received such a rotten inheritance in Europe, and at least he had a chance of glory.

On the home front, she was bequeathed an ever-rising deficit and public services (in particular the social care system) in a state of disarray, following years of unsustainable salami-slicing.


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Then there’s the housing crisis and a related and growing inter-generational chasm.

I’m afraid I don’t have any easy answers on Europe (well, apart from the obvious one) but I do think there is a way to deal with the social care crisis and improve the public finances and help address the housing crisis, in a way that is fair to all generations.

First of all, the government needs to accept that the social care system still needs more money, and get on with providing it.

Most commentators suggest that it would cost something like £3bn per annum to fill the hole.

The issue then is not whether, but how to pay. Unfortunately the cupboard is pretty bare.

“More borrowing is just a deferred tax on future generations.”

Increases in income tax would reduce work incentives as well as consumer spending, and would fall principally on the younger population already struggling with housing costs, cuts to working age and child benefits and, in due course, what is in effect a 9% graduate tax.

Taxing business when you are on the edge of plummeting out of the largest market in the world also looks like folly. Increases in VAT are both inflationary and regressive.

Further cuts to benefits and/or public services also look untenable; the real question is how much more the Treasury needs to find to deal with the latest crises and the clamour for public sector pay increases.

More borrowing is just a deferred tax on future generations, and will eventually risk very unwelcome increases in the cost of servicing government debt.

No doubt Ms May’s former advisers went through a similar thought process when coming up with the proposals on social care included in the Tory manifesto.

Unfortunately the conclusion they reached was fundamentally flawed. One of the principal problems with the current arrangements is that the financial pain is felt largely by the poor souls unfortunate enough to need care. Dulling that pain slightly for some, while spreading it to the slightly less infirm, was never going to be a long-term answer.

“A long overdue revaluation for council tax purposes would help, but wouldn’t deal with an inherent flaw in the system which means tax stops going up when homes reach £320,000.”

However, in one sense they were on to something. There is a small fortune locked up in equity in the housing market, and it is largely unearned and disproportionately owned by older people. Moreover it is lightly taxed. Owner-occupiers pay no capital gains tax, and even enjoy inheritance tax concessions. The nearest thing to a consumption tax is council tax, which is extraordinarily regressive. For example, in Kensington and Chelsea those in the very cheapest properties pay £700 per annum. Those in properties worth £20m pay just three times more.

In the circumstances it would not be unreasonable to ask those that have benefitted most from rising house prices to pay more to deal with the social care crisis. There is more than one way of doing so.

A long overdue revaluation for council tax purposes would help, but wouldn’t deal with an inherent flaw in the system which means tax stops going up when homes reach £320,000 – not much more than half the average house price in London. New bands could be introduced to help deal with that problem, but government would still need to find a way to redistribute money from rich to poor areas.

An alternative would be to create a new property tax, collected alongside council tax but returned to Treasury’s coffers.

In 2015 the National Audit Office estimated the value of housing stock in England as £5.6tn, which means that a tax of 0.0006% would raise some £3.36bn – enough to deal with the social care problem even accepting that some households would need relief, and the need for a deferred payment mechanism for the asset rich but income poor. That would equate to £300 per annum for a home worth £500,000. There is scope to play with this formula – for example, given housing is a basic need I would look hard at introducing a tax threshold above which a higher rate of taxation applied, placing more onus on the rich.

This change alone would give households a stronger incentive to live in accommodation they actually need, rather than using housing as an investment vehicle. This would free up some larger homes, and by reducing frothy sentiment in the market reduce the tendency for boom and bust.

This would in turn create a more stable and therefore less risky market, boosting supply.

If government was really sensible it would combine this change with wider reforms to the housing market. The introduction of the new tax would create the space to reduce stamp duty – a tax that is currently silting up the market in southern England. This would both stabilise prices and boost transactions.

“An alternative would be to create a new property tax, collected alongside council tax but returned to Treasury’s coffers.”

If, as seems likely, transactions went up markedly, this might not be at the expense of Treasury revenues, especially as people moving house tend to spend more on furnishings and white goods, and therefore VAT. Given the known correlation between transaction levels and the number of new homes built, this too could boost supply.

Government might even ask the Bank of England to take a more forceful role in regulating prices and risk, by applying more stringent capital requirements on mortgage lenders if and when prices rose faster than incomes. At that point the change is transformational for the housing market as well as the social care system.

I am not naïve enough to imagine these changes are likely any time soon. Raising tax is politically difficult, and those in power can pay a heavy price at the ballot box (assuming they can get it past parliament). This is of course precisely why David Cameron chose to kick the can down the road on social care, housing and much else besides, wasting the fiscal crisis that might just have given him a mandate for worthwhile reforms. And why, in all probability, Philip Hammond will not address these issues in his forthcoming Budget and Ms May will in turn leave as big a mess for her successors.

So I doubt I’ll be feeling sorry for her in five years’ time.

Matthew Bailes, chief executive, Paradigm

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