Economics: Reform of council tax and non-domestic rates

Ministerial submission

To: The Chancellor of the Exchequer

Issue

1. Council tax in England has been assessed against 1991 property valuations since the Local Government Finance Act 1992. The Welsh revaluation of 2003 is the only structural revisit of the domestic property tax base in mainland Great Britain since; Scotland remains on 1991 values, and Northern Ireland operates a separate domestic rates system based on 2005 capital values. Non-domestic rates are revalued every three years following the Non-Domestic Rating Act 2023, but the rateable-value base — the rental value of occupied premises — remains structurally unchanged since 1990. Both taxes are widely accepted to be poorly aligned with current property markets and with contemporary business models. This submission concerns whether to revalue, reform, or replace each, and at what level of government the design choice should sit.

Background

2. Council tax raises approximately £40 billion annually in England across an eight-band structure (A to H) with thresholds expressed in 1991 values. The statutory ratio between Band A and Band H is fixed at 3:1, meaning a property worth £30 million in 2026 pays at most three times the rate of one worth £40,000 in 1991. Against current values this is sharply regressive: typical effective rates run from approximately 1% of property value annually for the lowest-value properties to below 0.1% for the highest. The tax also acts as a partial penalty on domestic investment: extensions, loft conversions, and energy-efficiency retrofits that raise a property’s value may move it into a higher band, with the resulting tax increase persisting indefinitely; this runs against Government priorities on housing density, stock quality, and net zero retrofits. The Welsh nine-band revaluation in 2003 narrowed but did not eliminate the regressivity; a Welsh consultation on more substantial reform has been ongoing since 2023.

3. Non-domestic rates raise approximately £25 billion annually in England. The tax is calculated as rateable value multiplied by a statutory multiplier, with Small Business Rate Relief and a rolling programme of retail, hospitality, and leisure reliefs reducing the effective burden for many sectors. Three structural criticisms recur. First, the tax falls heaviest on businesses with the largest physical footprint per pound of turnover — most acutely high-street retail and hospitality, relative to online and fulfilment-warehouse-based competitors who pay proportionally less per unit of revenue. Second, the tax does not adjust for profitability: a struggling shop and a thriving one of the same floorplate pay the same. Third, the tax operates as a partial penalty on investment, since improvements that raise rateable value increase the bill.

4. The land value tax (LVT) has been advanced as a partial or complete replacement for both taxes by, amongst others, the Institute for Fiscal Studies in the Mirrlees Review of 2011, by Sir Peter Burt’s review of Scottish local taxation in 2006, and over multiple decades by the Liberal Democrats and elements of the Labour movement. Proponents identify three theoretical advantages: an LVT is borne by the landowner rather than passed through to tenants, since the supply of land is fixed; it does not penalise improvement, since the tax base excludes buildings (the same plot pays the same LVT whether occupied by a derelict structure or a well-maintained dwelling, removing a friction against retrofit, extension, and intensification that other property taxes impose); and it captures a share of the windfall uplift from planning consents and adjacent public infrastructure which currently accrues entirely to landowners. Practical objections concentrate on three points: valuation of unimproved land in the absence of an active market for it; transitional impact on asset-rich, income-poor households, particularly retired owner-occupiers in high-value areas; and the interaction with existing reliefs, notably the principal private residence exemption from capital gains tax. A more restricted application to commercial land only would address some of these difficulties: commercial parcels are fewer, ownership is more sophisticated and better recorded, the transitional question is operational rather than humanitarian, and the residential reliefs question does not arise. Denmark, Estonia, and the split-rate cities of Pennsylvania operate land-value elements within wider property tax systems and provide partial precedent.

5. Devolution complicates the question on two axes. Across the United Kingdom, council tax (and its Northern Irish equivalent) is fully devolved; non-domestic rates are devolved in Scotland, Wales, and Northern Ireland. The Welsh Government’s reform programme is the most advanced in Great Britain and is likely to diverge further from any English reform settlement. Within England, council tax and non-domestic rates are billed and collected by billing authorities (district and unitary councils), but bands, multipliers, reliefs, and exemptions are set centrally, and capping powers in the Localism Act 2011 further constrain billing authority rate-setting autonomy. Combined authorities and metro mayors have acquired some fiscal powers in recent years but do not cover England uniformly, and their fiscal powers vary; this gap, set out in the standing structural-problems digest, applies sharply here.

6. The 2024 Labour manifesto committed to replacing business rates with a system that would “raise the same revenue but in a fairer way” and “level the playing field between the high street and online giants”. It did not commit to council tax reform, though it acknowledged the regressivity of the band structure. The Welsh Government’s parallel consultation has signalled willingness to consider both substantial band restructuring and replacement with a percentage-of-value system. This submission responds to the business rates commitment and considers in parallel the long-deferred council tax question on which Government has not taken a position. Since taking office in July 2026, the Prime Minister has set devolution — extending the mayoral and combined-authority model beyond administrative powers toward genuine fiscal autonomy — as a central theme of his premiership, consistent with his tenure as Mayor of Greater Manchester. No formal position has yet been published on whether that agenda extends to design authority over council tax or non-domestic rates specifically; officials should treat the intra-English devolution question at paragraph 5 as a matter of live and rising ministerial interest rather than a background technical option, and may wish to seek an early steer from the Cabinet Office and No. 10 before this submission’s options are finalised for collective agreement.

The General Case

7. The case for substantial reform of British property taxation rests on five grounds:

• (a) the council tax base is 35 years out of date and bears an essentially arbitrary relationship to current property values, producing systematic horizontal inequities between similarly-priced properties in different parts of the country and a steep regressivity against actual value;
• (b) non-domestic rates as a tax on occupied premises produce a competitive distortion against businesses with high property requirements per pound of turnover that fifteen years of reliefs have moderated but not corrected;
• (c) the architecture of both taxes substantially predates modern property valuation infrastructure; replacement or modernisation is now operationally feasible at significantly lower administrative cost than was the case in 1990 or 1992;
• (d) the manifesto commitment to business rates reform is unlikely to be deliverable in any politically credible form without an integrated consideration of council tax, the two taxes being widely understood as one system in public discussion even where they are separate in law;
• (e) both existing taxes operate as partial penalties on property investment, since improvements that raise rateable or capital value increase the bill; this runs against Government policy on housing stock quality, density, and the retrofits required to meet net zero commitments.

8. The case against substantial reform rests on equally substantial grounds:

• (a) any revaluation produces winners and losers in proportions large enough to be politically destabilising; the 2003 Welsh revaluation moved approximately one-third of properties between bands and triggered sustained political resistance even though it was less radical than what current English arrangements would require;
• (b) replacement of council tax with any property- or land-value-based successor produces especially severe transitional effects for asset-rich, income-poor households, notably pensioners in London and the South East; credible humanitarian responses to this cohort require expensive deferral or relief schemes that erode the simplicity case for reform;
• (c) the existing system raises around £65 billion annually with very high compliance rates and well-established collection infrastructure; replacement carries significant revenue risk during transition and requires substantial advance investment in valuation, collection, and information-sharing mechanisms;
• (d) the investment-disincentive feature of the existing system, though substantively significant, attracts little public political complaint and has no organised constituency demanding its correction; the silent beneficiaries of reform on this ground would not offset the vocal losers from the wider structural change needed to deliver it.

Options

Option A: Revaluation within existing structures

9. Under this option, council tax in England is revalued to current values, with the band ratio cap potentially loosened (for example, to 5:1 or 8:1) and additional bands added at the top to capture the highest-value properties. Non-domestic rates continue on the existing three-yearly revaluation cycle with no structural reform, though sectoral reliefs may be rebalanced administratively. The reform may be implemented uniformly across England, or in part by giving billing authorities greater discretion on band thresholds and reliefs within a Treasury-specified framework.

10. For:

• (a) addresses the most egregious feature of the current system, outdated values, at the lowest possible structural cost, preserving collection infrastructure and operational stability;
• (b) the Welsh experience of revaluation in 2003 provides directly applicable operational and political precedent for a managed programme in England;
• (c) keeps the door open to more substantial reform later: a revaluation creates the modern capital-value register that any subsequent proportional property tax or land value tax programme would require.

11. Against:

• (a) revaluation alone leaves the structural tax-on-premises model for businesses unchanged, falling short of the manifesto commitment to a “fairer” system levelling online and high-street commerce;
• (b) the political resistance that has prevented English revaluation for 35 years would attach to this option in full measure; the Government must absorb significant short-term political cost for a more equitable but structurally unchanged outcome;
• (c) the option that has been recommended in successive reviews and rejected on each occasion would be pursued once more; the risk of mid-implementation reversal is real and historically grounded.

Option B: Proportional property tax with reformed business rates

12. Under this option, council tax is replaced with a proportional property tax set as a percentage of current capital value (typical proposals range from 0.5% to 1%, with regional or banded variation possible). Non-domestic rates are reformed by reducing the standard multiplier and introducing a complementary contribution varying with the occupier’s revenue or operating profit, calibrated to the manifesto objective of rebalancing online and physical commerce. Both reforms apply England-wide; devolved governments may follow or diverge. Within England, devolution may be exercised by allowing billing authorities or combined authorities to vary the PPT rate within a Treasury-specified band, or to design local reliefs within national parameters.

13. For:

• (a) eliminates the council tax band structure entirely, removing the cliff-edge effects at band boundaries and the regressive cap, while remaining a tax on property rather than land and so limiting the valuation and transitional difficulties of a full LVT;
• (b) the profitability or revenue adjustment to business rates directly addresses the manifesto commitment and the long-standing high-street/online imbalance, in a manner that successive structural reliefs have failed to achieve;
• (c) operationally implementable through extensions of the existing Valuation Office Agency and HMRC systems, without requiring the creation of entirely new infrastructure.

14. Against:

• (a) a proportional property tax on current values without compensating mechanisms produces severe distributional effects for asset-rich, income-poor households; deferral or relief schemes for this cohort require significant design and administrative cost;
• (b) a profitability- or revenue-based component to business rates introduces avoidance opportunities for multi-jurisdictional businesses, precisely the cohort the reform is intended to capture, and requires new information-sharing arrangements between HMRC and local authorities;
• (c) the reform retains two separate taxes on property; the analytical case for a single land-value-based replacement is not satisfied, and the reform may need to be reopened within a decade;
• (d) a proportional property tax continues the investment-disincentive feature of council tax, smoothly rather than at band thresholds; the policy friction against retrofits and density-increasing improvements is preserved even under structural replacement.

Option C: Land value tax on commercial property as a phased bridgehead

15. Under this option, non-domestic rates are replaced with a land value tax levied on commercial land only, with council tax reform pursued separately or deferred. The commercial LVT is phased in over five to seven years to allow valuation infrastructure to develop. Council tax may, in parallel, be revalued under Option A’s framework, replaced under Option B’s, or left under existing arrangements pending evidence from the commercial roll-out. Within England, devolution may be exercised through the same mechanisms as in the other options, with the simpler commercial base making locally-set multipliers within a national framework operationally more straightforward.

16. For:

• (a) provides a tractable test of LVT mechanics on the simpler half of the property base: commercial parcels are fewer, ownership is more sophisticated and better recorded, and the most acute political objections to LVT — transitional shock to retired owner-occupiers — do not arise on the commercial side;
• (b) directly delivers the manifesto commitment on business rates while building the valuation, registration, and collection infrastructure that any subsequent domestic LVT would require, creating a credible sequencing for later extension;
• (c) the asymmetry with council tax is operationally manageable: the two taxes already operate on entirely separate valuation regimes, and a commercial LVT alongside a separately reformed or unreformed council tax is no more administratively complex than current arrangements;
• (d) for commercial occupiers, removing the investment disincentive of business rates has particular relevance to brownfield redevelopment, the intensification of underused urban sites, and energy-efficiency investment in the existing commercial stock, all of which are Government priorities.

17. Against:

• (a) the bridgehead may not lead to a domestic extension: subsequent governments may find the commercial reform politically satisfying and the residential reform politically toxic in equal measure, leaving an unfinished structure;
• (b) leaving council tax unaddressed, or addressed only by revaluation, defers the largest distributional inequity in current property taxation — the band cap and outdated values — to a later Parliament;
• (c) a commercial-only LVT loses much of the theoretical case for LVT, which rests on a unified system replacing all property taxation; introducing it as a single-base tax may set a precedent for hybrid systems that prove difficult to consolidate later;
• (d) non-domestic rates are decentralised — administered by billing authorities within England and devolved to Scotland, Wales, and Northern Ireland; the bridgehead’s experimental logic depends on participation by many authorities that cannot be assumed, leaving a choice between a fragmented test less able to inform a later domestic extension or re-centralisation of the collection function (if not the revenue), itself reversing decades of business rates devolution.

Option D: Land value tax replacing both council tax and non-domestic rates

18. Under this option, both council tax and non-domestic rates are replaced with a single land value tax levied on the annual rental value of land, or its capital value, without regard to buildings or improvements. Phased implementation over ten years allows valuation infrastructure to develop and transitional reliefs for asset-rich, income-poor households to be calibrated. Implementation would, in the first instance, apply to England; devolved governments would have the option to follow. Within England, the design may be specified centrally, or in part devolved to combined authorities operating within a Treasury framework.

19. For:

• (a) provides the most economically efficient property tax, falling on the value of an unimproved resource, with no penalty on improvement or investment, and incidence falling on landowners rather than tenants or occupiers in the long run;
• (b) captures a share of the windfall uplift from planning permissions and public infrastructure that currently accrues to landowners and represents one of the largest untaxed transfers in the British economy;
• (c) replaces two separate property taxes with a single conceptually coherent system, simplifying compliance and administration once bedded in;
• (d) removes the investment disincentive present in both existing taxes and in any property-value-based replacement, including the proportional property tax of Option B; domestic households and commercial occupiers may improve, extend, and retrofit without consequent tax increase, aligning the tax base with Government policy on housing stock quality, density, and net zero.

20. Against:

• (a) valuation of unimproved land at scale is technically and politically difficult; existing methodologies from Denmark, Estonia, and the Pennsylvania split-rate cities demonstrate feasibility but at significantly smaller scale than the United Kingdom would require;
• (b) transitional effects are particularly severe for owner-occupiers in the South East, where land values constitute a high proportion of total property value; the political resistance from this cohort has historically been decisive in defeating LVT proposals across multiple jurisdictions;
• (c) interaction with existing land-related tax reliefs, notably the principal private residence exemption from capital gains tax, requires careful redesign; failure to address these in parallel would either generate windfall losses for current homeowners or create new avoidance opportunities.

Resource and Cost Implications

21. Option A would require the funding of a council tax revaluation programme, legislation to give effect to revised bands, and a transitional support programme for households moving bands; the Welsh 2003 revaluation provides a usable cost comparator scaled for population. Option B would additionally require the development of a national capital-value register for domestic properties and new information-sharing infrastructure between HMRC and local authorities for the business rates profitability component; costs are likely to run to the low hundreds of millions over a three-to-five-year implementation period. Option C requires the development of a commercial land value register, substantially smaller than the equivalent domestic exercise, and primary legislation; costs are likely to be lower than Option B because of the narrower base, though the per-parcel valuation complexity is higher. Option D requires the largest single property-data investment ever undertaken in the United Kingdom and a phased implementation programme; total cost is likely to exceed £1 billion over a ten-year period, partially offset by the eventual elimination of administrative duplication between the two existing taxes. All options other than A generate distributional effects that require some form of transitional relief, the costs of which depend on the design of those reliefs.

Legal and Devolution Considerations

22. Council tax, and its Northern Irish equivalent, is fully devolved across all four nations; non-domestic rates are devolved in Scotland, Wales, and Northern Ireland. Any of Options A to D would therefore apply only to England in respect of council tax and to England, and potentially Wales, in respect of non-domestic rates, depending on the Welsh Government’s choice. Substantial divergence between English and Welsh property tax architecture is now a near-certainty under any option and should be addressed in the design rather than allowed to emerge by default. The intra-English devolution question, whether design authority should be transferred from the Treasury to billing authorities or combined authorities, in whole or in part, under any of the options, is a substantive policy choice that should be settled in parallel with the architectural choice and not after it. The structural difficulty here is the absence of uniform intermediate governance across England: combined authority and metro mayor coverage is incomplete and their fiscal powers vary, so any devolved option would face a choice between accepting asymmetric outcomes across English regions, levelling up combined authority coverage as a precondition, or devolving directly to billing authorities (some 300 of them in England) with the consequent loss of strategic coherence. No human rights concerns are identified; Article 1 Protocol 1 ECHR protection of property is engaged but the European Court of Human Rights has consistently afforded states wide latitude in property taxation matters.

Requested direction

23. Ministers are invited to indicate whether the manifesto commitment to business rates reform should be delivered as part of an integrated programme also addressing council tax; if so, whether the programme should consist of revaluation within existing structures (Option A), structural replacement of both with proportional and profitability-adjusted successors (Option B), a phased commercial-only land value tax with council tax addressed separately (Option C), or full replacement with a land value tax (Option D); and within the chosen option, whether design authority should remain centrally specified or be devolved in part to billing authorities and combined authorities within England — a question officials should note is likely to attract direct prime ministerial interest given the Government’s wider devolution agenda, and on which an early cross-Whitehall steer is recommended before options are worked up further.