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Land Value Taxation

Published Monday, November 17, 2014

This note discusses recent debates over the case for taxing land values and proposals for a 'mansions tax' - an annual levy on the most valuable residential properties.

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The prospects for introducing a Land Value Tax (LVT) – an annual levy on the ownership of land – have been discussed from time to time over the last few years. Proponents have argued that, in addition to raising funds for the Exchequer, an LVT could also be used to stabilise house prices or to reform local government finance by replacing council tax. A further argument in favour of LVT is that taxing gains from increases in land values would be unlikely to distort incentives and should be economically efficient. First, imposing a charge on land values should not affect the availability of land since land is in fixed supply. Second, increases in land values usually come from external developments – such as the construction of infrastructure (roads, tunnels, rail networks, etc) – which require no effort or expenditure on the part of the land’s owner. Arguably landowners would face a windfall loss as soon as the tax was announced, but the tax should not create any disincentives to buy, develop or use the land in question.

However, there are significant difficulties to implementing the tax in practice – principally the need to value land separately from buildings, when most market transactions are for plots of land and the property situated on it. There are also concerns that a tax of this nature would penalise home owners on low incomes, particularly if trends in house prices have meant the value of someone’s home has grown significantly faster than their income.

To date there have not been any serious attempt to introduce an LVT, although recently there has been a good deal of discussion of the case for an abridged form of this charge: a ‘mansions tax’, charged annually on the value of housing, though only assessed on the most expensive homes. In the 2010 General Election the Liberal Democrats proposed a levy on homes worth £2m or more, although this element of the Party’s manifesto was not carried over into the Coalition Agreement. In February 2013 the Labour leader, Ed Miliband, announced that a Labour Government would introduce a mansions tax, and more recently the Shadow Chancellor, Ed Balls, confirmed that the tax would be banded, and that individuals liable to pay the tax who had relatively low incomes would have the option for deferring the tax, until their property changed hands. Mr Balls has suggested the tax would raise £1.2bn, and that homes worth £2 to £3m would pay £3,000 a year.

Commons Briefing papers SN06558

Author: Antony Seely

Topics: Housing, Taxation

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