2. Property Taxation in the United Kingdom 1

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1 2. Property Taxation in the United Kingdom 1 The United Kingdom is a unitary kingdom consisting of four parts: England, Scotland, Wales, and Northern Ireland. The structure of local government varies across the U.K. In England, there are four types of government structure. First, in the London area, there is the Greater London Authority (which includes the Metropolitan Police Authority, the London Fire and Emergency Planning Authority, Transport for London, and the London Development Agency), the London boroughs, and the City of London. Second, metropolitan districts run the services in the six metropolitan areas (Greater Manchester, Merseyside, South Yorkshire, Tyne and Wear, West Midlands, and West Yorkshire). Third, areas outside of London and the metropolitan areas are called shire areas. Most of these have two tiers of local authority shire districts (the lower tier) and shire counties (the upper tier). In some shire areas there is a third tier known as a parish or town council. Fourth, there are 46 unitary authorities in the shire areas. Property taxes on residential property (known as council rates) are set locally; property taxes on non-residential property (the non-domestic tax) are set nationally. For this reason, this note is divided into those two parts, followed by a discussion of the reform of the residential and non-residential property tax in Although national taxation is the same in all of the countries in the U.K., there are variations in local taxation. Most of the discussion in this note is based on how these taxes are applied in England. Revenue Importance Property taxes are an important source of revenue to local authorities, accounting for about 28 percent of local revenues in the U.K. in This proportion is up only slightly from 26 percent in The council tax accounted for 13 percent of the income of local authorities in the U.K. in and the national non-domestic rates accounted for 15 percent. The breakdown of municipal revenues by source is shown in Table 1. Non-domestic rates are shown under government-funded income because, as will be noted below, these tax revenues are pooled by the central government and redistributed to local authorities. Council tax (residential property tax) Prior to 1989 in Scotland and 1990 in England and Wales, all residential and nonresidential properties were subject to property taxes ( rates ) on the value of occupation. The value was measured by nominal rent. These taxes were replaced in 1990 by a poll tax (known as the community charge). The community charge was then replaced by the council tax on April 1, The reasons for these two reforms are discussed later in this note. 1 Prepared by Enid Slack, Enid Slack Consulting, Toronto. 1

2 Table 1: Local Authority Income by Source, UK, Percentage Source of income of total income Government funded: Revenue support grant National non-domestic rates Hypothecated grants Total government funded Local authority funded: Council tax Charges for services Other Total local authority funded Total income Source: U.K. Department of the Environment, Transport and Regions. Local Government Financial Statistics, No. 11, 2000, chapter 2, p. 19 Tax Base The council tax is a tax on the occupant of the dwelling and there is one council tax per dwelling. The full council tax bill assumes that there are two adults living in the dwelling. If there is only one adult, the council tax bill is reduced by 25 percent. The tax is reduced by 50 percent if the dwelling is no one s main home or if it is empty or a second home. Students and severely mentally impaired people are not counted among the number of adults resident in a dwelling. The tax base is the capital value as at April 1, The capital value is defined as what each dwelling might reasonably have been expected to realise if it had been sold in the open market by a willing vendor on April 1, 1991, taking account of any significant change to the property between then and April 1, Each property is assigned to one of eight value bands ranging from A to H as shown in Table 2. The list shows only the band to which the dwelling has been allocated and not its actual value. There is no individual valuation. Although there are legislative provisions for changing the banding of a property (for example, banding can be updated upon sale), this has not generally been done. The idea behind banding is to determine the relative values of properties within a particular area at a particular date. Any changes since then are not normally taken into account. 2

3 Table 2: Council Tax Bandings (England) Band Range of values (at 1 April 1991) Ratio to Band D A Up to 40,000 6/9 B 40,001 to 52,000 7/9 C 52,001 to 68,000 8/9 D 68,001 to 88,000 1 E 88,001 to 120,000 11/9 F 120,001 to 160,000 13/9 G 160,001 to 320,000 15/9 H Over 320,000 2 Source: Valuation Officer Agency of the Inland Revenue Banding establishes a dwelling s value relative to other dwellings in the local area. Any change in value because of a change in house prices generally will not affect the banding. Individual properties could be re-banded only under few circumstances. If the local area changes for the worse, all homes in the area may be placed into a lower band. If a house is expanded, it will be re-banded only after it is sold; if a home decreases in value because part of it is demolished, it may be re-banded immediately. If the property increases in value because the occupier has carried out improvements such as an extension, it will re-banded but not until it is sold. Initially, it was envisaged that there would be frequent revaluations of property and amendments to banding ranges to keep the base up to date. There has been no revaluation to date, however. More recently, there has been a proposal to revalue all property subject to the council tax. Exemptions to the tax base include properties which are: vacant or undergoing structural or other major works; owned by a charity and unoccupied for less than 6 months; vacant for less than 6 months and unoccupied because owners/tenants are in prison, mental care, hospital or nursing home, death; prohibited for occupation; kept for occupation by ministers of religion; resident elsewhere to take care of others; occupied by students; in possession of a mortgagee; occupied or managed by an educational establishment or charitable body and used predominantly for study; part of armed forces accommodations; in possession of a trustee in bankruptcy; consisting of a pitch or mooring not occupied. Tax Rates Local authorities set the council tax rate so as to balance their spending priorities against their own-source revenues, grants, and what they will be permitted to borrow. Each billing authority determines its own level of tax but the central government has the power to cap the level of tax for an authority under certain circumstances. 3

4 The council tax bill for each of the different bands differs according to a fixed ratio set out in the legislation. In particular, higher rates apply to properties with higher band values. Tax ratios are shown for England in Table 2 where ratios are calculated relative to Band D. For example, if the council tax for a dwelling in Band D is 180, the bill for one in Band A would be 120 (6/9 times 180) and the bill for a dwelling in Band H would be 360 (2 times 180). Tax Administration The tax is administered by billing authorities (such as district councils, unitary authorities, metropolitan councils, a London borough council etc.). They are responsible for notification, collection, and enforcement of the tax. Banding is the responsibility of the central government Valuation Officer. Valuations are carried out by the listing officer at the Valuation Office Agency (part of the Inland Revenue). Taxpayers can appeal their assessment to the listing officer in their area, for a limited time, but only on a few grounds. Grounds for appeal include, for example, the wrong person was billed, the dwelling should be exempt, the amount of bill is incorrect because a discount should apply etc. Taxpayers can appeal the banding of their home if they are a new taxpayer for the property or if there has been a material increase or reduction in the value of the dwelling or where the dwelling begins to be or stops being used for a business. If the listing officer agrees with the appeal, he or she will alter the valuation list. If the listing officer does not agree, he or she must refer the appeal to a Valuation Tribunal as a formal appeal. Valuation tribunals are judicial bodies, independent of the local council and the listing officer. Normally the valuation tribunal s decision is final but there can be an appeal to the High Court on a point of law. In terms of tax arrears, Table 3 shows collection results for the council tax in various parts of England for Overall, the receipts of council taxes as a percent of the net collectable debit was almost 96 percent; the arrears are just over 4 percent. 4

5 Table 3: Council Taxes Collection Results, England 2000/01 Receipts of 2000/01 council taxes by 31 March 2001 as % of net collectable debit Inner London Boroughs (incl. City of London Outer London Boroughs London Boroughs Metropolitan Districts Unitary Authorities Shire Districts England Total Note: The annual collectable debit is the council tax that authorities would collect if everyone liable paid (net of discounts, exemptions, disabled relief, transitional benefits and council tax benefits) Source: U.K. Department of the Environment, Transport and Regions. Local Government Financial Statistics, No. 11, 2000, chapter 5. Non-domestic tax (non-residential property tax) Non-domestic tax was introduced in 1990 to replace the former locally-determined business rates. The income from non-domestic rates is paid into a central pool and then redistributed to local authorities on the basis of population. Tax Base The base of the tax is the occupation of a property which is termed a hereditament. Certain items of plant and machinery may be rateable. Each property is assessed for tax on the basis of its rateable value which is the annual rent that the property could have been let for on the open market at a particular date (known as the antecedent date). For the 2000 list, the antecedent date was April 1, Rateable values are reviewed every 5 years. The next valuation will be effective from April 1, In the intervening years, the rates collected change by the amount of inflation. There are two types of rating lists: local rating lists relate to all properties within a billing authority s area; the central rating list applies to network type properties such as gas, water, and telecommunications which can be difficult to apportion among the local lists. Government properties have been included in local rating lists since April 1, Prior to 2000, they made payments in lieu of taxes on a notional rateable value. New lists are compiled every five years following a revaluation of non-domestic properties; within the five year period, lists are maintained and updated to reflect changes 5

6 in properties; new properties are added to the lists; demolished properties are removed etc. Exemptions are based on the use to which the building is put and not the ownership. Exemptions include: agricultural land and associated buildings; places of public religious worship; property used by the disabled; fish farms; sewers; certain properties of Trinity House; public parks; swinging moorings; road crossings over watercourses; properties in enterprise zones; and properties occupied by visiting forces. Tax Rates Assessment is multiplied by the Uniform Business Rate (UBR) set nationally with no control of local authorities. This rate, known as the tax multiplier, is a single figure determined by Parliament each year. There are different rates in England, Scotland, and Wales. The tax applies to occupiers of the property (tenants or owners); the rates are 50 percent for unoccupied properties. No rates are set for properties used for warehousing or industrial purposes. Rate relief can be provided by local authorities who are responsible for assessing rates bills and collecting taxes. Rates can be reduced for charities and other non-profit making bodies; businesses in rural areas such as the sole village general store or post office; unused properties; or, in limited circumstances, businesses suffering hardship. Legislation limits annual tax increases to the retail price index (RPI), having regard to changes in the total rateable values. Since the revaluation in 2000 resulted in shifts in property taxes, the central government implemented a self-financing transitional relief scheme. This scheme sets ceilings on the amount by which business rate bills may increase. The cost of the relief is paid for by limiting the decreases. The limit for real increases in business rate bills in in England was 12.5 percent for large properties, and 5 percent for small properties; decreases were limited to 2.5 percent for large properties and 5 percent for small. Limits also apply to increases and decreases in following years over the life of the scheme until the taxpayer is paying the full amount of the tax liability. Tax Administration The Valuation Office Agency of the Inland Revenue is responsible for determining the rateable value of all properties and maintains the rating lists on which tax payable is assessed. Local authorities are responsible for assessing rate bills and collecting business rates payable on properties within their authority. Income from properties on local rating lists is collected by billing authorities and paid into a national pool (one for England and one for Wales). Income from properties on the central list is paid directly into the pool. 6

7 The money in the pool is redistributed to local authorities on a per capita basis. There are special arrangements for London. Occupiers of property are required to complete a form which indicates the lease terms. Ratepayers can appeal their assessment to the Valuation Tribunal. If they are dissatisfied with the outcome, they may appeal to the Lands Tribunal. The latter is a more formal hearing where ratepayers need to be represented by legal counsel. Tribunal fees, in addition to costs of lawyers and expert witnesses, can be very high. Table 4 shows the collection rates for the non-domestic tax in England for Collection rates are over 97 percent. Table 4: Non-Domestic Rates Collection Results, England, 2000/01 Receipts of 2000/01 non-domestic rates by 31 March 2001 as % of net collectable debit Inner London Boroughs (incl. City of London 96.8 Outer London Boroughs 96.7 London Boroughs 96.8 Metropolitan Districts Unitary Authorities Shire Districts England Total Source: U.K. Department of the Environment, Transport and Regions. Local Government Financial Statistics, No. 11, 2000, chapter 5. Tax Reform Before 1990, all properties (residential and non-residential) were subject to rates. The tax was levied on the occupants of all buildings and each building was assessed by a central government agency on the basis of its rental value. The last revaluation in England was in Local authorities set the tax rates but, with the introduction of rate capping in 1985, some municipalities were constrained. Rate rebates were made available to low-income households. The residential property tax was abolished in In its place, local authorities were permitted to levy a community charge (poll tax) on all adults 18 years of age and over. Exemptions included people who were severely mentally handicapped, convicted 7

8 prisoners, people living in homes and hostels, and 18-year old school children. Full-time students in higher education got an 80 percent exemption. Low-income households could qualify for rebates of up to 80 percent. At the same time, the non-residential property tax was to be retained but at a uniform rate. Payments were to be paid into a pool and distributed on a per capita basis. Part of the reason for abolishing the residential property tax stemmed from the estimated impact of a revaluation from 1973 values. Any revaluation of this type means that there will be winners and losers. Moving to a poll tax eliminated this particular impact. Furthermore, the community charge was introduced to expand the tax base to finance local government services it widened the tax base to include everyone over 18. Under the old rating system, only the owner or the occupier of property was liable for the tax. The change to a poll tax increased the number of taxpayers from 20 to 40 million. In 1992, the community charge was eliminated and replaced by the council tax. Nondomestic rates were maintained. The council tax was introduced following problems with the community charge. The community charge had been introduced to achieve accountability. It was felt that everyone would be paying some part of the tax in the local authority area and would thus have an interest in how local authorities spent their funds. Collection rates were initially low, however, and the tax was expensive to collect mainly because people failed to register and many others refused to pay. Unlike property which is highly visible and in a fixed location, individual taxpayers were able to escape full reporting of the total number of taxable occupants. The community charge was also unpopular because it was felt to be regressive (borne relatively more heavily by lowincome households than high-income households). The council tax was more like the previous property tax (known as domestic rates). The main difference was that the valuation base changed from annual rental value to capital value. By assigning properties to broad categories rather than assigning a taxable value to each one, the council tax attempted to achieve simplicity and stability. This was done at the price of accuracy, however. Government reviews of the council tax suggest that it is working well as a local tax. 2 It has been widely accepted by taxpayers because it is well understood, predictable, and stable. Because the council tax uses an estimate of market value at a particular point in time (April 1, 1991) and then freezes assessments for the foreseeable future, however, it will have the same implications as any out-of-date assessment system: inequities will increase over time. Although there are no plans to change the council tax, the government is considering the introduction of a fixed cycle for revaluation such as every six, eight, or ten years to improve the fairness of the tax. 2 Department for Transport, Local Government and the Regions. Modernising Local Government Finance: A Green Paper, Part 5: Taxes and Charges. For a less sanguine view of the new tax, see C. Giles and M. Ridge, The Council Tax: An Examination of the New Local Property Tax in Britain, Journal of Property Tax Assessment and Administration, 1 (no. 2, 1995),

9 A recent review of the non-domestic tax suggested that the government is considering a number of changes. 3 First, the government is considering allowing local authorities to levy a supplementary local rate in addition to the central tax. The amount of the tax and the allowable annual increase would be controlled by the central government. Second, it has been suggested that there be mandatory relief for small businesses. Third, the government is seeking advice on changing the frequency of revaluations from 5 years. Fourth, the government is considering changes to the transitional relief arrangements. Other Taxes on Real Property The stamp tax is imposed on property transfers. Immovable property is included in the base of the inheritance tax, and capital gains on the sale of immovable property are subject to income tax. Although many attempts have been made in the past to institute various forms of land value taxation, betterment taxes, and other fiscal devices intended to capture increments in land value attributable to public policy changes (such as planning permissions or infrastructure development), such policies have proved both politically highly contentious and administratively complex. 4 At present, no such special taxes exist. Sources: Brown, P.K. and M.A. Hepworth A Study of European Land Tax Systems. Lincoln Institute of Land Policy Working Paper. King, David, N Accountability and Equity in British Local Finance The Poll Tax. University of Stirling, Discussion Papers in Economics, Finance, and Investment. Smith, Peter "Lessons from the British Poll Tax Disaster" National Tax Journal, Vol. XLIV, No. 4, 1991 U.K. Department of the Environment, Transport and Regions. Local Government Financial Statistics, No. 11, 2000 U.K. Department for Transport, Local Government and the Regions. Modernising Local Government Finance: A Green Paper Youngman, Joan and Jane Malme An International Survey of Taxes on Land and Buildings. The Netherlands: Kluwer Law and Taxation Publishers 3 Ibid 4 See Owen Connellan and Nathaniel Lichfield, Great Britain, in R.V. Andelson, ed., Land-Value Taxation Around the World (3 rd ed.; Malden, MA: Blackwell, 2000), pp , for a review. On the administrative aspects, see the classic study by C.C. Hood, The Limits of Administration (London: John Wiley, 1976), chap. 6 (pp ). 9

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