Could Labour really reform council tax to charge 0.5% of a home's value each year?

Could Labour really reform council tax to charge 0.5% of a home's value each year?
By: dailymail Posted On: August 02, 2024 View: 63

  • Rumours abound that the Government could shake up council taxes
  • With Labour frontbenchers unable to agree, how likely is council tax change? 

Rumours that council tax could be radically overhauled and replaced by a 0.5 per cent tax based on the value of a home have been doing the rounds in the press and social media.

Council tax is one of the areas Labour could in theory alter. The Labour manifesto financial promises included not to raise National Insurance, income tax or VAT, but left other taxes up for grabs.

But with this potentially spelling a massive uplift in bills for some, including older people living in high value homes but with relatively low incomes, how likely is this to happen?

Would Labour risk a poll tax-style revolt by changing council tax? We take a look at what it would mean and whether it could happen.

Changes billed: A council tax shake-up could be on the cards under the Labour Government

How does council tax work now?

When current council tax was introduced in 1991, every property in England and Wales was valued and put in one of eight council tax bands.

Band A is for properties valued at under £40,000 with owners paying the lowest level of council tax, while Band H was for properties valued at £320,000 or higher, with owners paying the highest level.

The bands are still used today, despite the average house price increasing by around 400 per cent, according to figures from the Land Registry.

Does Labour want to reform council tax?

Labour has given out mixed signals on council tax reform. Some Labour frontbenchers are in favour of it, others are not, and some have changed their minds from one to the other.

Prime Minister Keir Starmer is a case in point. Starmer has previously described the Welsh Labour government's plans for council tax reform as 'a blueprint for what Labour can do across the UK'.

Welsh Labour want to reband Welsh properties for council tax, as well as bringing in higher tax bands. This would not happen until 2028 and requires Welsh Labour to maintain their lead after Wales' 2026 election.

However, Starmer also said 'council tax was too high for too many people' and that did not want 'to raise tax' when interviewed by Sky News in June 2024.

Likewise, former shadow minister Jonathan Ashworth has gone on record that Labour had no plans to alter council tax bands.

Chancellor Rachel Reeves is in favour of council tax reform, as is culture secretary Lisa Nandy. 

How likely is it that Labour would alter council tax?

At the moment, it is impossible to say. The Government certainly has an incentive to raise money, with Rachel Reeves stating this week that the Conservatives left a £22billion hole in the country's finances.

Changing council tax would not change this substantially, as local authorities keep all of the money paid to them by people living in their area. 

But council tax going up overall would ease pressure on other areas of government spending, and could be used to improve local amenities. 

Council tax is also one of the taxes that Labour has left open to change as it was not ring-fenced from change before the election. 

How would Labour reform council tax?

There are several options for council tax reform. The one that the rumours relate to is an idea favoured by Labour MP and former Resolution Foundation thinktank chief executive Torsten Bell, which would bring in a system based on house prices.

This would see council tax bands scrapped, and instead households would pay a percentage of their house price as council tax every year.

Depending on the level of tax picked, this means some houses might see council tax bills fall, while others would rise. 

There could be massive increases for properties in London and the home counties but also the South, the South West and other more affluent areas or those popular with second homeowners.

Big difference: House prices across the UK vary substantially, Nationwide's index shows

The average UK home is now worth £285,000, according to the Office for National Statistics, and the typical band D home pays £2,065 in council tax a year.

That works out as an effective council tax rate of 0.73 per cent a year based on value.

So a 0.5 per cent level of council tax would mean lower bills for some, but this changes dramatically depending on where you live. 

For example, the average London house price is £525,248, according to Nationwide Building Society, so this would theoretically mean a £2,626 bill for an average home there.

Overall, bills would potentially rise substantially in the south of England but fall in the north of England, Wales and Northern Ireland.

Analysis by the Institute for Fiscal Studies thinktank found that proportional council tax would 'narrow the gap in property wealth between owners of high and low-value properties'.

But the IFS added that this would mean homes pay more in 124 local authority areas in England alone, increasing council tax bills by £1,230 a year for more than 4 million homes.

Another option for changing the council tax system is to keep the current one but update the bands with modern property prices. 

But changing council tax would be a major challenge - even if Labour did want to. The process would involve consultation and drawing up new legislation.

But the main challenge would come from homeowners, especially if council tax reform led to higher bills.

Although inflation has fallen to the Bank of England's target of 2 per cent, the cost of living remains high compared to pre-2021 levels.

Households that are struggling with high energy bills, rent, mortgages and grocery bills may well object if their council tax rises too.

Will Labour confirm or deny council tax changes?

Labour has been approached for comment on whether it has any plans to alter how council tax works.

SAVE MONEY, MAKE MONEY

Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.

Read this on dailymail
  Contact Us
  Follow Us
  About

Read the latest local and international news from trusted sources in one place.