Are you paying enough council tax? How Londoners could be underpaying property taxes by £3.1bn

Council tax and stamp duty are so out of step with house prices that Londoners are collectively under-paying taxes by £3.1bn while the rest of England is over-paying, according to new analysis.

Think tank Resolution Foundation said property taxes such as council tax and stamp duty in the UK are so poorly designed that they are driving regional inequality, impeding growth and preventing people from moving home.

Researchers found the UK raises more tax revenue from property than other advanced economies. Property taxes raise enough to cover 3.7% of gross domestic product (GDP), almost twice as much as the 2% average in other major nations.

Council tax and stamp duty are set to raise £74 billion by 2030-31. But by the end of the decade someone living in a home worth £100,000 will typically pay three times as much tax relative to the value of their home compared to someone living in a home valued at £1 million.

The result is that people living in expensive homes, primarily in London, are benefitting under the current system, which leaves the rest of England overpaying.

Hannah Aldridge, senior research and policy analyst at the Resolution Foundation, said: “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.

“The economic and fairness case for overhauling our housing taxes are clear. But the politics of reform has got hung up on those who lose out – such as those living in gentrified areas of London – even though most households in England would pay less tax.”

Why council tax is a problem

Council tax bands in England are determined by the value of a property in 1991 – back to when Big Issue was launched 35 years ago.

Since then, the average home costs five times more than it did in 1991 and almost seven times more in London.

Council tax’s failure to keep up with rising house prices means it is now considered regressive: that means that it takes a higher percentage of income from low-income households than those who are better off.

The result is that 80% of households in London ‘win’ from the current system, Resolution Foundation said. By comparison, 85% of households in the North East, where properties are much cheaper, are on-track to overpay by £710 a year on average by 2030-31.

Just over two thirds of households across England outside the capital overpay relative to a genuinely proportional residential property tax.

While council tax is the primary funding source for local authorities, it comes with severe penalties for people who cannot afford to pay.

Outstanding council tax debt in England sits at £7.4bn, rising 11.3% in the year up to 2025-26.

The majority of local authorities increased council tax bills by 5% in April while some councils in financial difficulty were granted permission to hike them by even more.

Missing a council tax payment has historically seen people liable to pay a full year’s bill – though the government announced in April that this was set to change. 

There is also the threat of prison for failing to pay, although it is rare.

But local authority funding is also facing a financial crisis.

As Resolution Foundation released its proposal, the Local Government Association (LGA) put out its own warning that cash-strapped councils will struggle to afford prime minister Andy Burnham’s plans for greater devolution.

The LGA said councils desperately need an increase in overall funding to close a £7bn funding gap by 2028-29 and meet demand for services.

Cllr Eamonn O’Brien, chair of the LGA, said: “If the government wants national, regional and local growth, it needs to fix the local foundations first. Strong, capable and financially sustainable local authorities are essential to deliver on our shared priorities for health, housing and giving people every opportunity to thrive where they live.”

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What should replace council tax and stamp duty?

Resolution Foundation said stamp duty should be abolished for primary residences and council tax scrapped.

Researchers called for that to be replaced by a flat 0.7% tax on a property’s value. That would mean if you had a property worth £350,000, you would pay £2,450 a year, whereas if you had a property worth £1m, you would pay £7,000 a year.

Low-income households should get a rebate while there should be a deferral scheme for households with high housing wealth but low income.

That would require an up-to-database of property valuations, which is no small undertaking.

The think tank also argued that stamp duty prevents around 100,000 house purchases every year.

Resolution Foundation’s proposal said that just abolishing stamp duty without taking action on other property taxes would “gum up the housing market”, give a windfall to existing homeowners and blow a £15 billion hole in the public finances.

The think tank called on the chancellor to set out a longer-term plan to switch to a proportional tax at the next budget, describing the case for an overhaul as “overwhelming”.

Aldridge added: “Housing taxes cannot be fixed overnight. But the chancellor should set out a sensible roadmap to reform in the budget next month.”

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