Building more homes Contents

Chapter 6: Making better use of the existing housing stock

229.In Chapter 1 we discussed the increase in ‘under-occupation’ of housing; over half of owner-occupiers are now categorised as ‘under-occupying’ their home according to the Government’s definition. This chapter will consider measures that could encourage better use of the existing stock of housing, including reforms to taxation.

Taxation relating to property

230.Witnesses highlighted capital gains tax, council tax, inheritance tax and stamp duty land tax as hindrances to making the best use of the existing housing stock. We now consider the problems and the solutions put to us.

Stamp duty land tax

231.A purchaser of residential property pays stamp duty land tax on increasing portions of the property price above £125,000, as shown in Table 7:

Table 7: Applicable rates of stamp duty land tax on residential property (England, Wales and Northern Ireland)290

Purchase price bands

Percentage rate (%)

Up to £125,000


Above £125,000 and up to £250,000


Above £250,000 and up to £925,000


Above £925,000 and up to £1,500,000


Above £1,500,000


Source: HM Government, ‘Stamp Duty Land Tax’, 3 June 2016:

232.The average house price in 2015 for England was £292,000; a purchase at this price would incur stamp duty of £4,600.291 The average house price in 2015 for London was £515,000; a purchase at this price would incur stamp duty of £15,750.292

233.The current system has been in place since December 2014.293 Increasing house prices under the old system had led to more transactions being brought into the scope of the tax and into the higher bands. 294 Mike Williams from HM Treasury told us that the Government’s 2014 reform had represented a “significant reduction” in stamp duty on house purchases and addressed any concern about the tax: “If you look at the people actually paying stamp duty, 98 per cent paid less.”295

234.Despite the 2014 reform, some witnesses still saw stamp duty as discouraging people from moving home. Countrywide said that while they estimated that 72 per cent of buyers paid no or less stamp duty than they would have done under the previous system, the reforms had only offered “brief respite for some [and] the stamp duty burden will continue to grow in future years”. They compared stamp duty rates today (see above) with 2005 where the average charge was £340 in England and Wales and £2,130 in London.296

235.Paul Johnson from the Institute for Fiscal Studies said he would put stamp duty “high on the list of suspects” as regards the reasons for lack of turnover in the secondary housing market.297 The Council for Mortgage Lenders said that stamp duty contributed to high transaction costs and so it had “a detrimental impact on activity levels, market liquidity and labour mobility”. They thought this was particularly so amongst people looking to downsize which was “restricting the choice of larger homes for younger families.”298

236.McCarthy & Stone, a provider of specialist housing for older people, called for an exemption for older people downsizing into specialist accommodation:

“[it] would cost little but would greatly encourage the take-up of specialist housing and increase the number of people downsizing, as well as free up under-occupied housing … The number of housing chains this would create … would more than offset any loss of income for the Treasury.”299

Paul Smee from the Council for Mortgage Lenders said however that if you start to give holidays for particular groups, “to my mind it brings out more and more the fact that the whole tax needs to be overhauled, and the question of when it is levied and on whom needs to be asked.”300

237.Urban Vision thought that any changes to stamp duty, “a relatively small proportion of the cost of buying a house”, would not improve affordability as raising a deposit to buy a home was a much more important consideration. 301

Capital gains tax

238.‘Private Residence Relief’ allows a homeowner to dispose of a main residence without having to pay capital gains tax on the disposal.302 A number of witnesses said this distorted the housing market. New Economics Foundation said “the unearned profits made on the ownership of property need to be more effectively taxed to make land a less attractive speculative investment.”303

239.NIESR said removal of the relief would “reduce the gains in an upturn and losses in a downturn so dampening cyclicality. Capital gains tax would also reduce the resistance to planning, reduce ‘under occupancy’ and even increase the flow of savings in productive investment.”304 Indexing the gains, exempting investment in the property, and making the gains payable on final sale or death would avoid hitting “cash poor” home owners; they thought the revenue gained could fully offset scrapping stamp duty land tax.305 Professor Steve Wilcox described how Sweden provides for a similar rollover system:

“while households are moving, if they are reinvesting, it does not become liable at that point.  It is only at the point that they exit the market, either to move into renting or when we all exit the market, that the capital gains tax then comes into play.”306

240.Professor Wilcox conceded it would difficult to introduce. Paul Johnson said there was a case for taxing the excess returns of owner-occupiers but said it would be very difficult to do retrospectively and prospectively,

“it could only possibly work if all parties were committed to it. If you thought that any party that might get in within the next 20 years was going to stop doing it, you would not sell your house before then, for sure, so it might reduce transactions in the market even further.”307

Inheritance tax

241.Inheritance tax is paid if a person’s estate is worth more than £325,000 when they die. The rate is 40 per cent on anything above the threshold. If someone’s estate is worth less than the threshold, the remaining threshold can be transferred to their husband, wife or civil partner’s estate when they die. The surviving partner’s estate can therefore be worth up to £650,000 before any inheritance tax is due.

242.The Summer Budget 2015 introduced a new transferable nil-rate band from April 2017 that applies to main residences. This allowance will be up to £100,000 in 2017/18, gradually rising to £175,000 by 2020/21.308 This is in addition to the existing inheritance tax nil-rate band, creating an effective £500,000 threshold for estates in 2020/21 which when transferred to a surviving partner means the effective inheritance tax threshold will rise to £1 million in 2020/21.

243.The new main residence nil rate band will also be available when a person downsizes or ceases to own a home and assets of an equivalent value are passed on death to direct descendants. The Exchequer Secretary to the Treasury told us that the 2015 Summer Budget change was “deliberately designed” not to discourage downsizing.309 Mike Williams from HM Treasury explained this provision was “an attempt to avoid causing the market to clog up” by deterring those who wanted or needed to downsize from doing so.310

244.Some witnesses were nevertheless critical of the recent changes. The IEA said they were:

“a step in the wrong direction … By treating housing wealth preferentially relative to non-housing wealth, these changes will introduce further distortions, and further inflate demand without adding anything to supply.”311

The Royal Institute of Chartered Surveyors called for an independent review into the role of inheritance in property markets, “so that we can properly understand what will encourage older people to downsize and get larger, second hand property back into the market”.312

245.Urban Vision however thought the recent changes to inheritance tax would “not make any difference to whether someone chooses to downsize or not; the choice to downsize or not is a complex one that involves many other issues and considerations”.313

Council tax

246.Council tax has been levied on residential properties since 1993.314 All homes are given a council tax valuation band by the Valuation Office Agency. The band is based on the value of the property on 1 April 1991:

Table 8: Valuation bands in England, based on property values on 1 April 1991315

Valuation band

Range of values


Up to £40,000


Over £40,000 and up to £52,000


Over £52,000 and up to £68,000


Over £68,000 and up to £88,000


Over £88,000 and up to £120,000


Over £120,000 and up to £160,000


Over £160,000 and up to £320,000


Over £320,000

Source: Citizens Advice, ‘Council Tax’: [accessed June 2016]

247.As noted above, the average house price in England and Wales was around £292,000 in 2015 (it was £65,200 in 1991) and in London was around £515,000 in 2015 (it was £85,750 in 1991).316

248.Professor Muellbauer described council tax as “the craziest system imaginable”:

“Not only do we have zero marginal tax rates but we have a highly regressive structure lower down all the way to the bottom, so the poorest in the poorest housing pay the highest tax rates as a fraction of value … we do not link the tax rates to market values.”317

He said if he was living in Princeton, New Jersey rather than Oxford, he’d be paying a property tax four times more expensive. Professor Malpezzi described the system as regressive and said it was “bizarre” that properties were so rarely revalued.

249.Paul Johnson said big houses were undertaxed. He thought there was a case for a revenue neutral substitution of council tax for stamp duty which would incentivise more moving and penalise people less for doing so. Professor Dorling called for the addition of more bands at higher values: “Adding bands would be seen to be fair by the vast majority of people because the vast majority of people would not be paying a band L, M and N. This is, in effect, what New York does.”318

250.Mike Williams from HM Treasury explained however that the Government were not keen on changing council tax:

“the Government have been clear both in their present configuration and in the coalition that they are keen not to significantly increase council tax, which obviously is a burden that some households feel quite acutely … Even if you thought there was a case for a revaluation, candidly, now would not be the time you would embark on it, because we are in the midst of business rates revaluation. That is occupying a considerable part of the Valuation Office Agency’s time.”319

251.David Miles, a former member of the Monetary Policy Committee, told the Committee that there was a strong argument for having property taxation, perhaps as a flat common percentage per year of whatever the value of the land, or the land plus the structure is. He thought if such a tax were levied at between 0.5 and 1 per cent, “you could probably raise as much revenue as is raised from stamp duty and council tax added together”.320 Other witnesses including Martin Wolf also called for a land value tax.321

252.The weight of evidence suggests that stamp duty land tax can deter people from moving into a smaller home, acting as a barrier to making the best use of the houses that we already have.

253.It is wrong to create specific tax rules, as is the case with recent changes to capital gains tax and inheritance tax, around housing.

254.Council tax is regressive. The bands should be amended so that owners of more expensive properties contribute proportionally more than owners of less expensive properties. This should be done in a revenue neutral way.

Lack of suitable accommodation for downsizing

255.Paul Johnson warned against overstating the role the tax system plays when it comes to downsizing:

“We have known for a long period, and from other countries’ experience, that quite often older people are reluctant to downsize, for all sorts of other reasons. There is no golden bullet that will suddenly result in a massive change in behaviour.”322

256.Witnesses told us there was a lot of unmet demand to downsize but it was difficult for older people to find suitable homes to move into. Gary Day from McCarthy & Stone said there were nearly 5 million older people who intended to downsize or were thinking about doing so.323 The Building Societies Association mentioned a survey of over 55s by Legal and General that found 32 per cent had considered moving to a smaller property in the last five years but only 7 per cent had actually done so.324

257.Chichester District Council said that typical retirement properties did not necessarily suit the needs of people looking to downsize:

“The only way to get older people to downsize is to ensure that there are products which are desirable and meet their needs. People living in rural suburban areas will not give up large detached properties with gardens and parking for high density properties with limited parking and little in the way of amenity land. The typical … 1 or 2 bedroom sheltered flat do not meet this need”.325

258.They also pointed to a lack of smaller properties to meet the needs of young people, older people downsizing and households splitting due to divorce.326

259.Changes to the taxation system may encourage some people to move home but any such changes are unlikely to make a large difference, particularly in terms of downsizing, as there is a shortage of suitable smaller accommodation for people to move into.

290 As at May 2016. Stamp Duty Land Tax no longer applies in Scotland.

291 Office for National Statistics, House Price Index, May 2016: [accessed June 2016] Calculation based on purchasing a freehold residential property that would not be an additional residential property. The average house price for England in 1992 was £66,000. In order to draw historical comparisons, the old ONS house price index has been used in this report (the ONS house price index was superseded in June 2016 by a new UK house price index but this has not yet been sufficiently backdated to provide for historical comparisons, see footnote 14 in Chapter 1 for further detail).

292 Ibid. The average house price for London in 1992 was £81,000.

293 Under the previous system, stamp duty was charged at a single rate on the whole purchase price with different rates for different bands. This created distortions; a disproportionate number of transactions took place just below the thresholds.

294 HM Treasury, Autumn Statement 2014, Cm 8961’ December 2014: [accessed June 2016]

296 Written evidence from Countrywide (EHM0108)

298 Written evidence from the Council for Mortgage Lenders (EHM0064)

299 Written evidence from McCarthy & Stone (EHM0072)

301 Written evidence from Urban Vision (EHM0116)

302 HM Revenue and Customs, Helpsheet 283, Private Residence Relief: [accessed June 2016]

303 Written Evidence from the New Economics Foundation (EHM0101). Toby Lloyd from Shelter said owning a home is “the only form of investment where you effectively pay no tax on unearned gains and then we wonder why people choose to overinvest in that particular asset class.  It is inevitable.” (Q 27).

304 Written evidence from NIESR (EHM0061)

305 Written evidence from NIESR (EHM0061)

306 Q 35. Professor Cheshire described it as “politically extraordinarily difficult.” (Q 42).

308 HM Treasury, Summer Budget 2015, HC264, July 2015: [accessed July 2016]

311 Written evidence from The Institute for Economic Affairs (EHM0120). Professor Muellbauer described the changes as “dysfunctional” as they would increase the demand for land as an investment (Q 82).

312 Written evidence from the Royal Institute of Chartered Surveyors (EHM0151)

313 Written evidence from Urban Vision (EHM0116)

314 Local Government Finance Act 1992, Part 1.

315 New build properties are allocated a nominal 1991 valuation.

316 1991 figures taken from the same source as 2015 figures. Office for National Statistics, House Price Index, May 2016, Table 12: [accessed Mat 2916]

324 Written evidence from the Building Societies’ Association (EHM0113)

325 Written evidence Chichester District Council (EHM0079)

326 Written evidence Chichester District Council (EHM0079)

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