A Proportional High Value Council Tax Surcharge

The Budget of November 2025 introduced a High Value Council Tax Surcharge (HVCTS) on homes worth £2m or more, payable by owners from April 2028 on top of unchanged Council Tax: £2,500 a year from £2m to £2.5m, £3,500 to £3.5m, £5,000 to £5m and £7,500 above, all CPI-uprated.²

Muellbauer's objection, made in the Financial Times in January and developed in a September INET Oxford working paper, is twofold. The banded design keeps the cliff-edges and caps the charge: a £50m house pays the same £7,500 as a £5m one. And it leaves Stamp Duty untouched where its marginal rates (12% for a primary home, 17% for a second) do most to deter moving.

His alternative, the proportional HVCTS (PHVCTS), has three parts:

• A proportional annual charge of 0.5% on the part of a home's value above £1.5m, doubled to 1% for second homes and homes owned from abroad.
• A tapered cut in Stamp Duty for purchases above £1.5m: zero at £1.5m, 50% at £3m and 62.5% from £4m.
• Deferral for the cash-poor: pensioners without a means test at 0.6% rather than 0.5%; others means-tested, or under an automatic option at 0.7%; the accrued charge settled on sale or transfer.

Point valuations replace bands, with fewer appeals, the paper argues. At least part of the Stamp Duty paid in the last five years above the new tapered rate would be offset against the charge.

Halving Stamp Duty above £1.5m, the obvious pairing, fails on horizontal equity: a £1.49m buyer pays the full bill and no surcharge, a £1.51m buyer gets Stamp Duty halved for paying a few pounds of PHVCTS.

The taper does that with a discount on the whole Stamp Duty bill of (P − 1.5) / P, where P is the price in £m, capped at 62.5% from £4m. Because the discount grows with price, the tapered bill is nearly flat between £1.5m and £4m, rising from £93,750 to £147,656: a marginal rate averaging about 2.2% in place of 12%, and 4.5% above £4m, with no notch at either point.

The paper treats the cap as a revenue dial; only the zero at £1.5m is fixed. It also wants the cut immediate and the surcharge two years later once valuations exist; a pre-announced cut would freeze the market.

Over 10 years the tapered saving beats the surcharge for both buyer types at every price to £12m. Over 15 years it still wins for a primary home above about £1.95m, and below that the surcharge leads by under £100 a year; for a second home the surcharge leads throughout, by under £1,000 a year up to £4m, where the discount stops rising, and clearly beyond. Our crossovers for the paper's rejected halving design match its £4.63m, £2.8m and £7.1m.

One caveat: the comparison ignores discounting. Stamp Duty is paid today and the surcharge later, so the crossovers sit a little higher, and the faster buyers discount the future the more the up-front cut is worth to them; the capitalisation table below puts numbers on that. With the taper capped at 50% from £3m the picture above £3m is the halving design's: over 15 years the surcharge wins for a primary home above £4.65m, and for a second home above £7.15m even over 10 years.

Existing owners not planning to move are worse off. Recent buyers who paid the full 12% are the hardest case, hence the paper's five-year credit; its formula matters. Crediting the full difference would give the buyer of a £2m home £38,000 against a £2,500 annual charge, a 15-year holiday; across five cohorts of roughly 10,000 purchases a year, that exempts about one liable home in seven and costs around £0.3bn a year for about 15 years.

The paper's £2.21bn a year rests on PRISM's counts and its ownership assumptions: 80% primary and 20% second or foreign-owned above £2m, 90% and 10% below.⁵ We reproduce that arithmetic from PRISM's underlying sales and put the Budget surcharge on the same stock.

PRISM: 2024–25 sales indexed to Q2 2026 values, reweighted to VOA stock across 2,163 local authority × band cells, less Council Tax-exempt dwellings cell by cell. PHVCTS revenue applies a blended rate to each home's value above £1.5m, 0.60% above £2m and 0.55% below, from the paper's ownership shares; Budget HVCTS the four banded rates.

The proportional charge raises 3.6 times what the banded one does; half the gap comes from above £5m, where the Budget charge stops rising, and the 20,000 homes there pay 42% of the total. The £1.5m to £2m band doubles the liable homes but contributes £197m, under a tenth: the case for the lower threshold is the taper and the trawl (the VOA already intends to screen from £1.5m), not the money. London supplies 73%.

At 0.5% on every home the charge would raise £1.86bn; the second-home shares add the rest. Band H second homes on the Council Taxbase definition are 4.5% of the stock nationally and 15.8% in Westminster, but that excludes main residences owned from abroad, which would also pay double. The OBR's 40% of £2m+ properties not owner-occupied comes from Stamp Duty returns, a transactions measure, and investors trade more often than residents.³

Neither yield takes a behavioural haircut. The paper argues £2.21bn is if anything low, since outside London expensive homes trade less often than cheaper ones even after composition is controlled for. Capitalisation pulls the other way. The OBR assumes the Budget charge is fully priced in by 2028–29, yet capitalisation, bunching and supply together cost it only £30m of £605m, because a flat charge does not shrink as the home's value does.³ A proportional charge does. Fully priced in at the OBR's 5% discount rate, a perpetual 0.5% takes about a tenth off a primary home's value above £1.5m, a sixth off a second home's, and the same off the yield; the fall in the home's price is smaller, because only the excess is charged. The Stamp Duty cut pushes the other way, by the OBR's price semi-elasticity of −1.5 per point cut in the effective rate. The table puts the two together across discount rates.

Capitalisation by discount rate

Surcharge fully priced in; Stamp Duty cut passed through on the OBR's price semi-elasticity

A perpetual charge t on value above £1.5m, priced in at rate r, cuts the excess (and the yield) by t / (r + t). The net columns are the price change at that value: the Stamp Duty rise of 1.5% per point of effective-rate cut (+6.8% at £3m, +10.4% at £10m for a primary home, +15.1% for a second) less the surcharge's fall.

At the OBR's rate the package is price-neutral or slightly positive at every value and for both buyer types; at the Green Book's 3.5% the two roughly cancel, and only below it does the surcharge clearly win. The table takes the paper's cap. With the taper capped at 50% from £3m nothing changes at £3m or below, and at £10m the Stamp Duty rise is +8.4% for a primary home and +12.1% for a second, so at the OBR's rate the net effect there is +0.6% and −2.1%: a little lower, and slightly negative for the most expensive second homes. A fall of a tenth is the surcharge alone, on excess value, with nothing on the other side. Which rate applies is open. The leasehold market prices claims a century out at 2.6% or less, and lease-extension valuations use a deferment rate of about 5%; households choosing over their own money discount far faster, most taking a lump sum over an annuity at break-even rates above 17%.⁶ A charge a future government might repeal is discounted at the risk-free rate plus the annual chance of repeal; one in twenty a year turns 5% into 10%. Nor is capitalisation full in practice: Michigan buyers ignored known future tax rises almost entirely, and in the 2008–09 Stamp Duty holiday sellers captured about 40% of the cut, not all of it.⁶ The asymmetric case, the surcharge fully priced in at 5% and the Stamp Duty cut passed through at 40%, lowers prices by 1% to 4% for a primary home and 2% to 8% for a second, rising with value. Our cautious case rounds that to 5% across the board; it cuts the yield to £1.96bn.

The paper claims the extra transactions the cut generates "would offset most, if not all" of the revenue lost per transaction, helped by portfolio adjustments once the surcharge arrives. We test that with our Stamp Duty page's tools: the OBR's steady-state semi-elasticity of −6 above £1m (a 1 percentage point cut in the effective rate raises transactions by 6%), applied sale by sale to every dwelling sold for £1.5m or more in England in 2025.⁴

The surcharge's own effect on moving has no evidence base, so we assume a shape: an uplift in transactions proportional to the surcharge rate as a share of value, zero at £1.5m and rising to a ceiling at the top of the market: 25% in the central case, 50% as the upper sensitivity.

Land Registry price paid, England, calendar 2025, dwelling types only; Welsh postcodes excluded. Each sale is charged on today's schedule with 40% of sales assumed to pay the 5 point additional-dwellings surcharge, the OBR's reading of the £2m+ market. Non-resident surcharge not modelled; unscaled to HMRC receipts. £2m+ sales were down about a fifth in late 2025, so a normal year's base and cost run higher.

On these numbers the taper on its own does not pay for itself. It removes £1.04bn of the £2.60bn collected above £1.5m, 40%, because the biggest discounts fall on the sales that carry most of the revenue. The OBR response brings 1,680 extra sales (17% of the 9,659 sold) and claws back £359m; surcharge-driven churn at a 25% ceiling adds 869 more and £189m; the assumed uplift averages 7% across the sales above £1.5m, from under 3% between £1.5m and £2m to 20% above £5m, and compounds with the OBR response to 9% of the count. The net cost is £0.49bn a year.

Counted in owners rather than sales, the churn assumption is 869 extra moves a year from 331,000 liable homes: one owner in 380 induced to move by a charge averaging £6,700. Self-financing on its own would need a ceiling of about 90%, which is 3,100 extra moves, one liable owner in 110 each year: turnover among the most expensive homes nearly doubling because of a 0.5% annual charge.

Sensitivities

Net loss against 2025 receipts on the same sales. The price fall is the package's own, so the counterfactual keeps 2025 prices; the tapered bill and the transaction response are computed on the lower ones. The range spans the OBR's middle-market −4.5 and the upper end of academic estimates.

Only the most generous corner, −8 and a 50% churn ceiling, brings the loss down to £0.15bn. The elasticity cannot close the gap because the discount is so large at the top: a 62.5% cut in the bill needs transactions to rise 167% to stand still, and the OBR response delivers about 48% for £5m+ sales. The taper is a cut of about £1.0bn a year for top-end buyers before responses, and the efficiency case is strong: our Stamp Duty page puts the deadweight loss of the tax above £1.5m at 21p to 33p per pound raised, rising with price, at rates that make England an international outlier.

Where to cap the taper

The paper fixes only the zero at £1.5m and treats the cap as a revenue dial. Stopping the taper at £3m, a maximum discount of 50% rather than 62.5%, changes nothing below £3m and halves the bill above it, so the marginal rate at the top is 6% instead of 4.5%. A £10m buyer pays £557,000 rather than £418,000, against £1,114,000 today.

Same sales, elasticities and churn assumptions as above; the surcharge is unchanged, so the package differs only by the Stamp Duty line.

The lower cap saves £156m a year net, more than the £120m static gap, because the extra sales the bigger discount buys above £3m do not pay for themselves. Self-financing still needs a churn ceiling of 64%, but the generous corner of the sensitivity table now breaks even. The cost falls on the 1,762 buyers a year above £3m, who still get half their bill back, and the horizontal-equity logic holds unchanged below the cap. Above it the surcharge keeps rising as a share of value while the discount does not, which is why the second-home crossovers move down. On the efficiency argument the two caps are close: 6% at the margin is a long way from 12%. If the Treasury wants the money, 50% at £3m is the setting to argue for.

Other tax heads. The extra sales carry spending on agents and services, and the tax on that spending is a small offset the tables leave out. In the central case 2,550 extra sales at a mean price of about £3.7m generate some £142m of agent commission at 1.5% and £15m of conveyancing, survey, removals and broker fees, on which VAT is £31m. Agents carry high fixed costs, so marginal fees drop through to profit at well above the 9% Savills' UK residential business earned on £200m of revenue in 2025; at incremental margins of 25% to 55%, corporation tax is £9m to £19m, with about £11m of income tax and National Insurance on negotiators' commission. All in, £52m to £63m a year, about an eighth of the net Stamp Duty loss. Capital gains tax on second homes sold sooner is brought forward rather than raised.

Chains. Every extra sale above £1.5m sits in a chain the tables do not follow. A downsizer who sells a £4m house and buys a £1.2m flat pays £63,750 of full-rate Stamp Duty below our range; a mover trading up from £1.2m to £1.8m leaves a sale behind whose buyer pays the same. The OBR elasticity was estimated on counts that include such knock-on sales within its own range, but nothing below £1.5m is counted here, and the surcharge-driven churn counts nothing beyond the sale itself. If half of the 2,500 extra sales in the central case produce one full-rate purchase between £1m and £1.2m, that is £55m to £80m a year, a tenth to a sixth of the net loss. It cuts the other way only where an extra sale above £1.5m is itself a chain's onward purchase, which the elasticity already includes. Like the OBR's own costings, ours is partial equilibrium, and on this point the net loss is more likely overstated than understated.

Taken together, the package raises about £1.7bn a year: £2.21bn of surcharge less £0.49bn of Stamp Duty, against £615m static for the Budget design, or £0.4bn after the OBR's behavioural haircut. With the taper capped at 50% it is £1.9bn; with prices 5% lower on both sides it is still £1.4bn. Outside it sit the two years of cut before the surcharge starts, the credit for recent buyers, and the £57m or so of other tax heads.

The lower threshold roughly doubles the valuation task, 331,000 homes rather than 159,000, and the trawl starts lower still: the paper suggests £1.25m, which on PRISM means screening some 525,000 homes, 1.6 per taxable home. The Treasury has reportedly pencilled in £150m for identifying the £2m+ stock alone.

The paper argues automated valuation is more accurate between £1.5m and £2m than at the top of the market (see our AVMs for tax page). A banded system concentrates disputes at the thresholds, where a small change in value moves the bill by £1,000 or more; under a proportional charge a 5% error on a £3m home is worth £750 a year. The paper's answer, following Paul Cheshire, is that the owner pays for the revaluation unless it finds an error above 10%, and then pays on the higher value.

Deferral is priced as simple interest, 0.1 or 0.2 points a year on top of 0.5%, indexed to inflation: a real rate of roughly 4% (pensioners) or 7% (others) over ten years, but about 2% or 3% over twenty, because the premium does not compound. The Exchequer is covered; the long-deferring get the better deal.

The Budget surcharge's administrative problem applies unchanged: an owner-based tax collected through occupier-based Council Tax billing, with receipts going to the centre, and now a ledger of deferred liabilities councils do not keep. That argues for HMRC administering it, as it does the Annual Tax on Enveloped Dwellings.

• Building capacity. Low Council Tax and high Stamp Duty at the top push owners to improve rather than move (the paper cites London basements), tying up skilled labour that volume housebuilding needs. Right, but unquantified.
• Labour mobility. Real, but small at this end of the market.
• Empty and under-occupied homes. A 1% annual charge on second and foreign-owned homes changes the sums for keeping a prime London flat empty (Atkinson and Mingay, 2024): owners sell, cheaper under the taper, or let. The strongest of the four, and where the design differs most from the Budget's.
• Conversions. Council Tax rewards knocking three flats into one house; the surcharge reverses that, since a £5m house pays £17,500 and three £1.75m flats £1,250 each. Real, but small.
• Downsizing. A charge that rises with value, paired with a cheaper move, makes it worth an older household's while to trade a £4m house for a £1.6m flat, freeing family homes where they are scarcest. The paper does not make the point. It should: it is also the main way the surcharge feeds the chain effects noted above.

The paper's larger point is that the valuation machinery built for the top 1.3% of homes is what a full revaluation needs, making a proportional charge at the top a first step to replacing banding altogether. That is the case we make for the Proportional Property Tax, with the same caveat: the difficulty is the transition, not the destination.

Property Tax Lab is independent and non-partisan and does not endorse proposals. The proportional design is the better tax: it removes the cliff-edges, charges a £20m house more than a £5m one, and pairs the new annual charge with relief from the transaction tax that does most damage at this end of the market. It is also honest about the trade the Budget design ducks: an annual charge on owners for lower Stamp Duty on buyers.

Our reservations are about the numbers rather than the structure. The Stamp Duty taper is not self-financing on any elasticity we can defend, but it does not need to be: the package is comfortably in surplus, and the paper would be stronger for saying so. The revenue rests on a second-home share nobody has measured for the stock, and takes no haircut for behaviour. The uncapped rate means 20,000 homes above £5m carry two-fifths of the yield, and their owners are the most mobile and best-advised taxpayers; collecting from owners abroad is untested. And doubling the homes to value doubles the exposure to a VOA the Budget design already strains.

None of that argues for the banded version. It argues for costing the proportional one properly, and for treating the taper's cap and the ownership rates as revenue dials, not settled parameters. On the cap, our numbers point to 50% at £3m: it keeps the efficiency gain and saves about £160m a year.