201. Which Taxes Will Rachel Reeves Raise This Autumn?

0:00Dan Neidle:Queen Carvania stood haloed by the morning sun. An army hung on her every word.

0:08Steph McGovern:My champions! I have sold my chariot on Carvana! T 'was a lovely SUV, an inexplicably queenly offer. They're even coming to the castle to collect it! Tonight, we feast!

0:24Dan Neidle:An offer you can feast on. Sell your car today on Carvana. Pick up these, may I fly.

0:30Steph McGovern:What has come out over the last week or two has been this idea of changing the taxes on properties.

0:38Dan Neidle:I hate this shit. I think it's awful. People talk about being asset rich, cash poor. But if you're sitting on a£2 million house, congratulations, you are rich.

0:49Steph McGovern:Hello and welcome to The Rest Is Money with me, Steph McGovern, and podcast friend Dan Needle, who, as you know, is a leading tax lawyer and investigative journalist. So, Dan, we've got you back to talk about some of these tax ideas that are being thrown around at the moment. I mean, it's dead interesting, this, isn't it? It's like, put them out over the summer, leak all these ideas, and see how people react to it.

1:14Dan Neidle:I hate this shit. I think it's awful, and I wish they wouldn't do it, because we end up with an atmosphere of slight financial fear and confusion, which I think is bad for the UK.

1:27Steph McGovern:Yeah, it's that uncertainty again, isn't it? So, you know, we know Rachel Reeves has got this big black hole in the finances. We know already about cuts to spending that happening. So everyone is talking about the only answer being here, if she wants to fill that black hole and stick to these fiscal rules, is for her to increase taxes. but on top of this she has this election manifesto which says they'll not put up taxes for working people so no rising income tax national insurance and VAT now obviously we've talked a lot on this podcast about how by proxy you are kind of putting up taxes for working people but what has come out over the last week or two has been this idea of changing the taxes on properties so first of all What's your initial reaction to these kind of tax ideas that are being put out?

2:22Steph McGovern:And then we'll go through the specifics of each one.

2:25Dan Neidle:Name an area of tax. I don't know. Oil, gas, beards. Somewhere in Whitehall, there is a filing cupboard burgeoning with proposals for changing tax on that. And so a minister says, you know, let's look at tax on property. Ta-da! A civil servant triumphantly pulls out something they prepared years ago. and property tax. There'll be more than almost any other area of tax. I'll contradict myself. Probably almost certainly more than any other area of tax. All of these old proposals can now land on ministers' desks. Some of them will be realistic. Some of them will be useless. But there will be a lot of proposals.

3:04Dan Neidle:It looks like we are getting snippets of a bunch of different proposals, many of which are being confused and rolled together.

3:11Steph McGovern:Yeah, because they are confusing. I mean, one of the big ones that everyone's talking about, because everyone's thinking about how it affects them personally, you know, anecdotally, this is the one all my family are chatting about, is this property tax on homes, which are worth over half a million. So kind of replacing stamp duty with an annual, a new annual property levy. What taught me through this? Do you think this is a good idea? Will it make them much money?

3:40Dan Neidle:probably probably i need to do a boring thing and confess a conflict of interest so right at my age given my background people will be unsurprised to hear that i i own property i'm probably not going to move again so i'm not going to benefit from abolition of stamp duty and i'll be hit by an ongoing property tax okay so the conflicts out there okay conflicts out there but stamp duty is a really terrible tax a terrible tax because when you tax something you get less of it stamp duty is a tax on moving house. So surprise, surprise, it stops people moving house. And that's kind of predictable. The really surprising thing is quite how big the effect is.

4:22Dan Neidle:The OBR looked at what happened when stamp duty rates changed in 2014. They saw a massive effect. Every 1 % increase in stamp duty knocks about 7 % off the number of transactions. So stamp duty all together weather probably deters about 70 ,000 house sales a year. That's a massive effect. And that has a whole bunch of impacts. First of all, it makes people miserable. You want to move home. You can't because of stamp duty. It damages the job market because people can't move to find jobs. It reduces house building because that reduction in volume of purchases means that house sales are slower, meaning that house building is more difficult.

5:03Dan Neidle:It takes you longer to get your money back. So stamp duty is a deeply damaging tax. And I don't think there's an economist in the country who thinks it's a good idea. The same thing to do is to abolish it and replace it with an ongoing property tax. Doesn't mean it's popular, but it's the right thing to do.

5:19Steph McGovern:Yeah. And you've said this before on the podcast about stamp duty not working. And as you say, there's a lot of people out there who agree. So this property tax then, do you i mean isn't there isn't there a danger that might stop people doing up their houses because then it'll add value to them and then might push them over that 500 grand threshold or you know it might stop them moving house completely so even though you're taking away as you say the stamp duty for for buyers sellers might then just be put off and that could slow down the market but do you think this will be less is that why you think this would be better

5:56Dan Neidle:The detailed implementation is both difficult and very important. So one key point, it should be a tax on land value, not a tax on property. If I buy an empty plot and I spend a lot of money doing it up, it is a bad thing if I then get taxed for the improvement that I've created, because that's disincentivizing me from improving. It'll be much better to tax me on the empty plot, giving me an incentive to do it up. And then once I've done it up, my effective rate of tax compared to value I've created falls. So land value taxes give you an incentive to develop property. A tax that's just on the value of the property gives you an incentive not to develop property, not to improve your property.

6:39Dan Neidle:So that's important. And another feature is, so this may not, well, this is unlikely to be popular in many quarters. I think for people looking to get on the housing ladder, the disappearance of Stanthede should be a good thing. And the fact that it improves the market generally should be a good thing. But that's a slightly ephemeral theoretical benefit. And there are unlikely to be demonstrations in support of the tax. On the other hand, someone who's living in a£600 ,000 house probably doesn't want to be paying a tax every year that they weren't paying before. So they will probably be rather unhappy.

7:15Dan Neidle:And that's the political problem. Whenever you have a tax change, even a very sensible one like this, supported all across the political spectrum, from right to left, there will be losers and they'll be unhappy. The danger comes if government does things to compromise with those people and make them happier, and that causes damage. So an obvious thing to do would be to say, okay, this is very hard. We're not going to apply this tax to people currently in houses. We're only going to do it to people who move house. The problem there is then a lot of people just won't move house. They'll say, oh, I'm in this fantastic, very expensive house, and I'm not paying this new tax.

7:52Dan Neidle:But if I move, I will. So I'm not going to move. So you've ended up achieving something similar to stamp duty. Maybe worse, you've disincentivized moving. You've slowed down the housing market. So compromises with the electorate like that, tempting for politicians, but potentially undo the benefit of what you're trying to achieve.

8:12Steph McGovern:There's also in this the regional argument, isn't there? The fact that there's obviously such a big difference between house prices, you know, in the north, for example, versus, say, London. So, you know, this would particularly hit London hard. But I don't know if that's a bad thing because that then might encourage people to move further afield outside of the south and maybe that's good for regional inequality but it's absolutely right that if we're

8:42Dan Neidle:talking on properties above say half a million pound in london you you could just fall over such properties down the average street the further you get from london particularly if you're going in a northerly direction the the less common such houses are so it could well be perceived as a tax from London in many respects it would be that you know this wealth this wealth is real this people may not feel like it people talk about being asset rich cash poor but if you're sitting on a two million pound house congratulations you are rich and then the other side of this just on

9:15Steph McGovern:the stamp duty point is there's obviously a threshold before you start paying um stamp duty and for first-time buyers it's like what is it three hundred thousand pounds um and you know if if you're not a first-time buyer and it's your main home that you're buying, it's$125 ,000, isn't it? So I know the average property is a lot more than$125 ,000 these days. But again, coming back to that regional point, it's not as big of a deal in the poorer areas as it is in the rich areas. That's right.

9:48Dan Neidle:But the average price of a detached house in the UK as a whole is£440 ,000. and there is pretty chunky stamp duty on that. I think if you're not a first-time buyer, that's£12 ,000. £12 ,000 for most people is a large amount of money and makes buying that house more difficult than it otherwise would be. And there's one housing market. We don't have a market for first-time buyers and a market for other buyers. And if you make it harder for someone to buy a million-pound house, then you're making it harder to construct a chain with a million pound house at one end and 200 ,000 pound flat at the other.

10:28Dan Neidle:So anything that deters transactions is a bad thing. That's not to say we shouldn't tax people in million pound houses, I think we should, but transaction taxes are a bad thing.

10:38Steph McGovern:So obviously the deal with this is trying to fill this black hole. That's the reason why these ideas are being put out there. have you got any idea on what difference this would make this property levy on homes over half a million like would is there any estimates out there on how much it might bring in compared to

10:59Dan Neidle:the stamp duty system so the most detailed proposal out there was put together by a rather brilliant economist called tim lernick for onward which is a center right think tank and it wasn't a land value tax it was what he called a proportional property tax and it was really clever what he said we do is we replace council tax with an annual levy on properties below£500 ,000, which would be about 0.44%, and then replace stamp duty with a national levy of 0.54 % or a bit more on property values above£500 ,000. But that wasn't raising any tax. That was just replacing stamp duty and council tax. Now, of course, you could tweak those numbers and raise more tax, but I suspect politically that gets a bit hard i can imagine maybe i'm naive but i can imagine a political cell that goes here we are reforming property tax this is a good thing it's better for growth it's better for first-time buyers it's better for anyone looking to move house some people will pay more tax some people pay less but we promise to you there is no extra tax raised from this that that seems to me a defensible line to take once you start raising tax from it I suspect will become a good deal less popular.

12:14Dan Neidle:How much could you raise? I mean, we're probably talking single-figure billions in terms of how much you could realistically raise from a measure like this. Something else people discuss is putting additional bans on council tax. So at the moment in England, council tax bans run from A to H. And if you are in H, you pay twice as much as if you're in an average band D. That's kind of weird because it means that someone in a a hundred million pound mansion pays only twice as much as someone in an average house so a lot of these things to do is say okay let's make h1 h2 h3 let's make different bands if you do that it's a lot simpler than a dramatic new property tax but you're only raising hundreds of millions rather than billions can i plug tax policy associates website i'm hoping we'll have a calculator up soon um showing how much you can raise from all these different proposals

13:02Steph McGovern:no that's great um i know because i mean we've talked about that so often haven't we done between ourselves and also with various other people we've had on about how ridiculous it is that we've still got this cancelled tax system based on valuations from 1991 it just feels like that is an easy win truly you can present that as we're just updating things everyone you know things have changed so much since 1991 and you know i saw some estimates from savils the estate agents this is in a great article in the financial times about the combined value of the uk houses market hit£9 trillion for the first time last year, compared to just£3.4 trillion a decade earlier.

13:45Steph McGovern:So that is a staggering increase in value in houses. So it does feel like that is where the tax changes could come legitimately.

13:55Dan Neidle:Updating the valuation is absolutely the rational thing to do. It is nuts that we have 34-year-old figures in our council tax bands. at the top of band H is£320 ,000, which buys you pretty much nothing anywhere in the country these days. Now, I think on average, values have risen about five times. If we updated those values, then some people will pay more, some people will pay less. And again, that's something which for politicians is a scary thing. Yes, the tax nerds think it's a good idea, and it would make the system clearer and more transparent, but it's not really a political win. On the other hand, there will be angry people.

14:32Dan Neidle:And let's not forget, council tax was born after the catastrophe of the poll tax, which probably brought down the Thatcher government. And because of that, council tax is seen as a terrifying tax by politicians, which you touched at your peril.

14:48Steph McGovern:Dan, sit tight. Loads more to ask you about, but we're going to go to a quick break.

14:59Steph McGovern:so let's have a look at some of the other things being talked about and as you say there's a bit of a crossover between these it's it's hard to unpick them as individual things but capital gains tax you currently don't pay on your main house when you sell it what do you think the impact could be of changing that so every so often some was about to certainly be i won't i'm going to

15:22Dan Neidle:be diplomatic and someone comes across a true statistic the cost of the capital gains tax exemption on homes is 31 billion pounds they go wow we could raise 31 billion pounds by abolishing this exemption no no you you couldn't and the reason why you couldn't is imagine you are in an average house,£440 ,000. So if you bought that some years ago, you might have bought it for£250 ,000. So you are currently sitting on a gain of, let me do the maths,£190 ,000. That's fantastic. And that is the average gain you'd see on an average house over the last 15 years. Today, if you move house, you're going to pay stamp duty, if you move into an equivalent house for about 12 000 pounds which is a lot but if you were taxed on your capital gain which just reflects house post movement nothing else you would have additional tax of 45 000 pounds i'm going to guess there is basically no one in an average house who could afford a 45 000 additional tax bill so no one's going to move house if you impose tax on that basis you'd have what's called lock-in.

16:39Dan Neidle:It's been seen in some other countries. People wouldn't move house when the house is hitting it again. We can say from our behalf figures, housing market transactions purchases would fall by at least half. So you can't do that. It would be a catastrophe. And no country does that. There are countries which kind of charge capital gains on people's homes, but then they always have very generous exemptions, which mean that pretty much no one pays it. The most common way they do this is deferral. You say, okay, you've got this gain, you're moving house, we're going to defer that gain, and you won't pay tax when you sell now, you'll pay tax when you sell your last house, or when you downsize.

17:18Dan Neidle:And in almost all countries, if you die, there's never any tax. So deferral kind of means the tax is never paid, or even worse, it means the tax is never paid, and people never sell, and you end up with under-occupied houses. so deferral is you don't raise much tax and it's not great the other thing in america they have a big exemption for people so no country in the world really taxes capital gains on people's homes

17:45Steph McGovern:and it's not realistic to them that we can yeah because as you say it'll change behavior and stop people selling their homes you know you mentioned a couple of examples from other countries then is there anywhere you think where they're getting this right on how they tax properties and land and everything else. Is there anyone we can learn from, do you think?

18:07Dan Neidle:I think quite a lot of countries don't have a big transaction tax when you buy, but have an annual tax. So that famous Socialist Republic of America, many US states, including, again, radical socialist states like Florida, have an annual property tax of kind of around one percent and they do it why why can't we yeah and why can't we just because it's

18:32Steph McGovern:such a big shift from what we've had that politicians feel too scared because they think