The IMF has published a staff report and a selected issues paper following the conclusion of consultations with the UK under Article IV of the IMF’s articles of agreement.

The UK economy has been growing steadily and growth is set to continue at an average of around 2.2% in the medium term. However risks and uncertainties include the global economic outlook, slow productivity growth, high household debt and the referendum on membership of the European Union. The IMF highlighted the importance of strengthening pro-growth and pro-stability aspects of the fiscal consolidation including scaling back the distortionary tax expenditures, reforming property taxes and reducing the bias in the tax system towards debt.

The selected issues paper notes that property taxation is relatively high in the UK. The UK has a number of property-related taxes including council tax, business rates, stamp duty land tax, capital gains tax and inheritance tax. These property taxes accounted for more than 10% of general government tax revenue in 2014, with council tax, business rates, and stamp duty land tax accounting for 5%, 5% and 2% of total tax revenue respectively.

Council tax

Nearly 40 percent of dwellings subject to council tax receive some form of discount. Some of the discounts provided under the council tax can encourage inefficient use of residential properties.

Single occupants or short-term empty properties receive discounts for council tax. These discounts are likely to create incentives for home owners to keep properties unused; or for single people to live in more expensive properties than they would otherwise choose to do. Reducing these discounts could potentially facilitate more efficient use of residential properties, thereby helping to alleviate supply constraints.

A large proportion of the council tax discounts is granted to single-occupancy homes. Removal of single-occupancy discounts would probably result in more efficient use of the available housing. Further reduction of discounts for short-term empty properties is possible under the new system allowing scope for increasing efficiency by reducing the discounts.

Stamp Duty Land Tax (SDLT)

Stamp duty land tax receipts have moved generally in line with house price movements. Stamp duty land tax collection increases when house prices are rising and decrease when house prices are going down.

Transaction taxes are however inefficient. Property taxes discourage transactions with the result that properties are not held by those who could obtain the most benefit from them. These taxes also create disincentives for people to move, thereby reducing mobility in the labor market and preventing people or businesses from living or operating in properties of the most appropriate size and location for them.

The selected issues paper suggests that the UK should gradually reduce reliance on stamp duty land tax and increasingly replace it with property taxes that tax properties as a percentage of their current updated values. Modifying stamp duty land tax is likely to increase the number of transactions and increase household mobility, thereby enabling more efficient use of the current housing supply.

Moving to value-based property taxes

Moving away from transaction taxes, which accrue to the central government, and moving towards value-based property taxes, which provide revenue for local governments, is likely to improve incentives for local governments to approve new residential construction (because local governments will benefit from the larger property tax base). This would therefore increase the housing supply.

Property taxes may create liquidity problems for property owners who do not have cash available to pay. This problem could however be avoided by the gradual phasing-in of higher property taxes, as this gives owners adequate time to secure any financing that maybe needed.