Buy farms, not flats

Are property taxes too low or too high? A tweet from The Daily Mail’s Becky Barrow reminded me this week to check just how today’s taxes fare against those in the pre-council tax days.

Becky notes stamp duty hasn’t “always been a rip off”. In 1992, it was charged at a mere 1% on all houses sold for more than £30,000. But the thing about taxes in the UK is that there is usually a good amount of give and take.

The UK’s tax take is always knocking around between 33% and 36% of GDP. That’s rather lower than public spending (which is a shame…), but no government has managed to push it any higher, or shown much inclination to allow it to go lower.

So, one way or another, the rise in stamp duty is likely to have been matched by a fall in another property tax.

Which one? It’s pretty much what we used to call rates (the modern equivalent is council tax). Rates, abolished in 1990 after the dismal poll tax experiment, were based on the imputed rent for any given house.

They were both relatively high and much hated: as far back as 1907, British historian George Trevelyan complained that “the rates are one of the highest and the worst taxes under which Englishmen… have ever groaned”. Was it really that bad?

Let’s look at one small London house to see. In 1985, 2 Gaspar Mews in South Kensington sold for £180,000. Its sale particulars show that the annual rates payment at the time was £1,139 – 0.63% of its market price. Inflation-adjust £1,139 and you get £2,925.64 today.

Now guess what you would pay in council tax on 2 Gaspar Mews today. It is £1,786. A mere 60% of what the absolute level of tax used to be. Now look at the relative tax rates. The house is worth around £1.6m now.

So, its annual property tax comes in at not 0.63% of its market price, but just over 0.1%. Relative to the value of the house, the annual levy has collapsed (as for that matter has the ability of councils to collect local revenues).

Look at it like that, and suddenly paying 5% in stamp duty when you buy a South Kensington mews house doesn’t seem so big a deal. The change might also help us make sense of the rise in house prices in the UK since 1990.

We tend to think that the biggest thing affecting house prices is the cost (and availability) of credit. But that’s largely because, today, that is the main cost of owning a house.

However, the collapse in annual property taxes must surely have played a part here too over the past 25 years: if the cost of owning an asset falls substantially, then it should be no surprise that the market price of that asset rises.

It works the other way too, of course, something London buyers might like to bear in mind as the rhetoric around mansion taxes steps up. Perhaps those with spare cash should be buying farms instead of flats?

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

  • GreenGray

    On reading the print edition earlier, I note that the 6.3% referred to in the printed version has become the more correct 0.63%, but it also removed part of the rationale in the article. Using a factor of 60 makes the article sensible, using a factor of 6 makes it less so.

MoneyWeek magazine

Latest issue:

Magazine cover
What a farce!

John Stepek on surviving the Greek fallout

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

From ADRs to Z scores – all the terms you wish you understood, but were too embarrassed to ask about.

Gervais Williams: if you want real dividend growth, buy small-cap stocks

Merryn Somerset Webb interviews small-cap stock expert Gervais Williams about how penny shares outperform blue chips 'again and again'.


Which investment platform is the right one for you?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from, with varying fees and charges. Find out which is best for you.


30 June 1937: The 999 emergency services line opens


On this day, the 999 emergency services telephone line opens in London, but it wasn't until a week later that the first call was received when a man spotted a burglar in his garden.


Anatomy of a Grexit: how Greece would go about leaving the euro

Jonathan Loynes and Jennifer McKeown, economists at Capital Economics, look at the key issues and challenges of a Grexit, how it might be best managed, and set out a timetable for change.