Is Land Undertaxed in Britain?

Originally published on Henry George Foundation on August 24, 2026. Republished on Progress.org with permission.

A few weeks before he became Prime Minister, Andy Burnham reaffirmed his view that there is a strong case to be made for reforming UK property taxes. In support of this view, Burnham restated his belief that land is undertaxed in Britain. This claim was challenged by Tim Leunig, who is chief economist at research foundation Nesta and has recently proposed his own solution for radical reform of UK property taxation. Leunig cautioned against seeing land as “a big cash cow”, stating that while it is true that land is “atrociously badly taxed” in Britain, “it is not the case that land is undertaxed in Britain”.

On the face of it, Leunig’s view that land is not undertaxed in Britain might seem to be confirmed by the fact that the UK raises the most revenue from property taxes as a share of GDP than any other OECD country. The 2.8% of GDP which the UK raises from annual property taxes is the second highest in the OECD after Canada. Add in Stamp Duties1 and the figure rises to something more like 3.7%2, the highest in the OECD. Since a substantial proportion of UK property value consists of land value (significantly more than 50%), it might seem evident that land can’t really be undertaxed in Britain.

But this analysis is far too simplistic. Let’s look at some of the complicating factors.

Commercial land has to be treated separately from residential land

One complicating factor is that the rate at which commercial land is taxed is very different from the rate at which residential land is taxed. Britain’s main tax on commercial property, the National Non-Domestic Rates (‘business rates’), is widely recognised as being among the most distortionary of UK taxes. The tax is set as a percentage of the value of ‘business property’, which includes produced inputs such as buildings and various forms of plant and machinery. As the highly influential Mirrlees Review3points out, taxing produced inputs is economically inefficient because it distorts choices firms make about their production processes, which in turn reduces aggregate output. The business rate penalises long-term investment in these forms of fixed capital, ultimately ensuring that economic activity in the UK is artificially skewed away from the property-intensive modes of production that are essential to productivity and growth.

If the business rate is such a bad tax, why not simply abolish it? One problem is that simple abolition would deprive the exchequer of a significant amount of revenue (£27.6 billion in 2025-26), which would, of course, need to be generated in some other way. A more serious problem is that the business rate is a classic example of a tax which is actually two taxes: a good tax on land and a bad tax on buildings (and other produced inputs). Simple abolition would provide a windfall gain to commercial property owners, generating a corresponding increase in the selling price of commercial land. In the long run, rents paid to commercial property owners by business operatorswould be likely to rise.

A more economically justifiable course of action would be to replace the business rate with a form of tax that bears on the value of commercial land without at the same time rewarding inefficient use of buildings and penalising long-term capital investment. As the Mirrlees Review concluded, the form of tax that best fits these criteria would be a land value tax that applies specifically to commercial sites, to be implemented gradually and with transitional protection for those most affected. Not surprisingly, over the past decade an increasing number of think tanks and commentators from across the political spectrum have been calling for the introduction of a commercial LVT as a replacement for the business rate4.

The Mirrlees Review suggested that a rate of tax ‘somewhere in the region of 4%’ of capitalized land values would be required to replace business rates on a revenue-neutral basis. If this estimate is at all accurate, then it seems highly unlikely that a commercial LVT could reasonably be expected to generate more revenue than is currently generated by business rates. Commercial land would be overtaxed if LVT generated more revenue than the business rates currently generate. So if the focus is solely on commercial land, Leunig’s claim that land is not undertaxed in Britain certainly seems plausible.

On the other hand, a tax rate of around 4% of the value of commercial land would be much higher than the current effective rate of tax on commercial land. In other words, the introduction of the form of tax that makes most economic sense would lead to a substantial increase in the rate of tax on the value of commercial land. The existing arrangements, which are economically destructive in a number of different ways, leave too much commercial land value in private hands. Indeed, one might say that business rates are economically destructive precisely because they leave so much commercial land value in private hands. Produced inputs like buildings, plant, and machinery are overtaxed because commercial land is undertaxed.

There is a sense, then, in which Leunig and Burnham are both right – when it comes to commercial land.

Residential land is where the action is

But commercial land accounts for only a fairly small fraction of total UK land value, which is dominated by residential land. Let’s shift the focus, then, to residential property taxes, starting with the Council Tax. Because of its banding system and because it is still (in England and Scotland5) based on hastily assessed property values from 1991, the Council Tax is highly regressive: while the occupiers of properties in the North East face effective rates that can exceed 1% of property value, rates paid by occupiers of properties in central London can be a s low as 0.02%. Consequently, a household living in a modest home in Blackpool may well have a higher Council Tax bill than the wealthy owners of a mansion in Westminster.

The other main UK residential property tax is the Stamp Duty Land Tax (SDLT). Because it is more proportional to property values than the Council Tax, the SDLT does significantly increase the contribution made by landowners to public revenue (though, despite its name, it is a property tax rather than a land tax). However, SDLT is a property transaction tax. This makes it particularly distortionary and inefficient because it discourages people from moving house and results in inefficient use of residential land. When it comes to SDLT, Leunig is absolutely right to claim that land is atrociously badly taxed in Britain.

Is he perhaps also right to say that residential land is not undertaxed? After all, the amount of revenue raised by the residential component of SDLT has risen dramatically over the past two decades, with rising house prices pushing more transactions into higher tax bands (the tax generated nearly £10.4 billion in 2024/25, up from around £8.5 billion in 2023/24 and £4-5 billion a year twenty years ago). If this revenue is added to the revenue generated by the Council Tax, then the total raised by residential property taxes as a percentage of GDP is certainly well above the OECD average.

The OECD comparison is irrelevant!

However, OECD comparisons that only take account of the amount of revenue raised from residential property taxes as a percentage of GDP are not particularly helpful in determining whether or not residential land is undertaxed. In fact, the OECD comparison is largely irrelevant to this question.

To see why, consider the case of the United States. The total revenue raised by US residential property taxes as a percentage of GDP is also well above the OECD average. Does this mean that residential land is overtaxed in the US? It certainly does not. This is partly because high US residential property taxation is offset by massively favourable treatment by other parts of the tax code. For example, individuals are entitled to $250,000 worth of tax-free capital gains on the value of their residential property (the figure is $500,000 for married couples), while recurring residential property tax liabilities are deductible from federal income tax (though such deductions are capped at $10,000).

Consequently, even with rates of residential property taxation that are among the highest in the OECD, the US tax system as a whole is heavily biased in favour of owner-occupied housing. This imbalance has a highly distortionary effect on the US economy, resulting in a misallocation of financial capital, increasing generational inequality, reduced mobility of labour, and the amplification of housing-related macroeconomic instability. The returns to residential landownership are massively undertaxed in the US, despite the fact that it has the highest residential property taxes in the OECD.

The tax treatment of owner-occupied housing is probably even more favourable in the UK than it is in the US6. As in the US, the accumulated gain in the value of owner-occupied property is not subject to capital gains tax (CGT) (although in the UK the entire value of principal private residences is exempt)7. But unlike the US, the UK has a national VAT, which does not apply to the consumption value of owner-occupied housing services. The CGT and VAT exemptions for owner-occupied housing amount to a huge tax subsidy for those fortunate enough to be owner-occupiers.

In the least well-off parts of Britain, where property values are at their lowest, land value is also very low, sometimes essentially zero. This means that Council Tax in these areas is mainly a tax on wealth (in the form of housing) rather than land. Conversely, in the most well-off parts of Britain (i.e. London and the South East), where property values are at their highest, land value is extremely high, probably often as much as 80% of total property value (and perhaps even more in the wealthiest parts of London). This means that the puny Council Tax bills in these areas amount to a tiny fraction of the value of the residential land. Effectively, the Council Tax is a regressive wealth tax on the occupiers of properties in the least valuable locations, while leaving the lion’s share of the value of residential land in high value areas in private hands. Consequently, the enormous tax bias in favour of owner-occupied housing is barely at all offset by the UK’s existing residential property taxes.

The (not so) hidden cost of the favourable tax treatment of owner-occupied housing

As I pointed out in my response to the Tax Policy Associates report on the implementation of LVT in England, we have good reason to think that the favourable tax treatment of owner-occupied housing is a key contributing factor to the UK’s longstanding productivity problem, which places significant constraints on the economy’s capacity to generate sustained real wage growth, maintain fiscal resilience, and finance high‑quality public services.

Recent ONS figures suggest that the problem of slow productivity growth remains as challenging in 2026 as it has been since the Global Financial Crisis, with multi-factor and labour productivity growth since 2019 significantly below the pre-2008 trend growth of around 1.8% and 2% respectively. These figures reflect weak growth in capital services since 2008, which in turn reflects long-term under-investment in productive capital such as buildings, machinery, software, digital infrastructure, and so on. At 18.9% of GDP in the first quarter of 2026, total investment (business and government) is significantly lower in the UK than in any other G7 nation, and has been the lowest as a percentage of GDP in the G7 for 27 out of the last 33 years.

^{Source: Dibb and Jung, 2024, Rock Bottom: Low investment in the UK economy, Institute for Public Policy Research.}

Since the mid-1990s, when house prices started to rise after falling in the late 80s, mortgage lending has soared in Britain, while lending to the productive sector has stagnated. According to analysis of Bank of England data by the campaign group Positive Money, mortgage lending constituted 57.1% of total bank lending in the UK at the end of 2025, having risen from less than 45% in the late 90s.

^{Source: Positive Money, March 2026, Where did banks lend in 2025?}

^{Source: Positive Money, March 2026, Where did banks lend in 2025?}

The shift since the 1990s from productive lending to real estate lending has been suggested as one of the primary explanations for the so-called “productivity puzzle”. Credit flows to nonfinancial business typically support productivity growth through private sector investment and innovation, while credit flows to households generally do not. Since most mortgage finance enables people to buy existing property on existing land, increased mortgage lending serves mainly to increase land and house prices, which in turn strengthens demand for mortgage credit, further pumping up house prices in a destructive ‘housing-finance feedback loop’.

While this misallocation of capital is attributable to a wide range of factors, the tax bias in favour of residential property is clearly heavily implicated, since it reduces the user cost of capital for housing relative to other assets, which biases portfolios and credit toward housing and away from business capital. Replacing the Council Tax and SDLT with a residential LVT would partially reverse the tax bias in favour of owner-occupied housing. This would increase the cost of simply holding residential property as a passive investment, reducing the extent to which the allocation of financial investment is distorted by the tax system. Tax-induced over-investment in real estate would then be less likely to crowd-out more productive business investment.

The tax bias in favour of owner-occupied housing creates an imbalance in the tax system that Britain simply cannot afford to sustain. However, a revenue-neutral shift from the Council Tax and SDLT to LVT would barely cover the imbalance in the system resulting from the VAT exemption for housing. The tax system would still be heavily biased in favour of owner-occupied housing because of the CGT and IHT exemptions for primary residences. In other words, even after the existing residential property taxes are replaced by a LVT, residential land will still be significantly undertaxed relative to other assets that yield returns which are subject to income tax, CGT, and inheritance tax.

Tim Leunig is absolutely right to say that land is atrociously badly taxed in Britain. The business rates and SDLT are perhaps the two worst UK taxes, powerfully distorting economic activity and reducing welfare and well-being as a result. But Andy Burnham is absolutely right to say that land is undertaxed in Britain. Commercial land is somewhat undertaxed, though the introduction of a commercial LVT as a revenue-neutral replacement for the business rates would rectify the situation. Residential land is grossly undertaxed, and would remain significantly undertaxed even after the introduction of a residential LVT.

The flip-side of the coin: Taxes on the productive economy are too damn high!

Rectifying and reversing the current imbalance in the tax system would not only help to solve Britain’s longstanding productivity problem – it would also help to ease the desperate fiscal situation currently facing the British government. Although the budget deficit is significantly smaller now than it was in 2010 in the aftermath of the GFC (around 4.3% of GDP in 2026 compared to around 10% in 2010), public debt in March 2026 was 93.8% of GDP, up from 65% of GDP in 2010. With spending on debt interest exceeding £100 billion in 2025-26, the government is under increasing pressure from the financial markets (the so-called ‘bond market vigilantes’) as the cost of further borrowing remains high.

Despite the restricted fiscal space available to the government, public spending is forecast to continue to rise year on year by 2029-30, driven by demographic pressures, higher debt costs, and protected budgets for a range of government departments. The problem, of course, is that even relatively minor changes to taxes like VAT, income tax, and National Insurance Contributions (NICs) can have a powerful impact on employment incentives8, resulting in significantly fewer hours worked at a time when skilled labour is already in short supply. It has been estimated, for example, that the frozen tax thresholds announced in 2022 and 2023 will reduce labour supply by the full-time equivalent of 130,000 workers (0.38%) by 2028-29.

The overall burden of taxation in Britain is higher than it has been since 1950. Higher earners are paying significantly more income tax than they were 25 years ago, with the top 1% of income tax payers now paying 29% of all income tax, up from 25% in 2010 and 21% at the turn of the century. But above average earners are also facing higher tax bills due to frozen tax thresholds and child benefit clawback. This undermines the incentives of highly skilled and experienced higher and above average earners (particularly those approaching the age of retirement) to work longer hours and stay in employment. At a time when Britain is in desperate need of doctors, dentists, engineers, electricians, plumbers, nurses, teachers, air-traffic controllers, social workers, and numerous other skilled professionals, contractors, and tradesmen, the tax system is encouraging more and more of the people who have the much-needed skills and experience to work fewer hours and retire earlier than they might otherwise choose.

Perhaps lower-income earners should be asked to tighten their belts and make a larger contribution to public revenue? After all, effective tax rates for average UK earners are now at their lowest point since 1975, and are much lower than comparable rates in many European countries with similar levels of welfare expenditure to that of the UK. But while it is true that rises in the tax-free personal allowance implemented by the Coalition government in the 2010s have reduced the effective rate of income tax for average earners, this has been more than offset by rises in the cost of living (particularly housing, energy, and childcare costs), as well as high student loan repayments for graduates. With the number of people not in employment, education, or training (NEET) rising ever higher, Britain surely cannot afford to further disincentivise employment by increasing taxes on wages or consumption.

What Britain can afford to do is rebalance the tax system by removing, or at least significantly reducing, the subsidisation of owner-occupied housing. Over-taxation of the productive economy, with the weakened employment incentives that this entails, is a direct consequence of the radical under-taxation of residential land, with the misallocation of capital and stagnant productivity that this entails. Reducing the favourable tax treatment of owner-occupied housing surely has to be part of the solution to Britain’s fiscal problem.

The road ahead

Unfortunately, this does not mean that we can suddenly start taxing residential land at the sort of rate at which it would be taxed in some ideal, economically functional society. Leunig is right to caution against seeing land as a ‘big cash cow’ – any revenues raised from a residential LVT must be used to fund reductions in some other more economically damaging form of tax, whether this be SDLT, Council Tax, or NICs. As the recent Tax Policy Associates report makes clear, if a residential LVT is introduced without regard to the effect this might have on elderly homeowners, landlords, banks, pension funds, and the broader financial sector, the consequences could be catastrophic.

On the other hand, if we persist with the current policy of subsidizing owner-occupied housing at the general tax payer’s expense, the consequences will certainly be extremely dire for large sections of the population, and could in any case be catastrophic if another financial crisis ensues. A residential LVT (or proportional property tax9) should be introduced as a matter of urgency – not just because the existing taxes are inefficient and unfair (which they undoubtedly are), but because residential land is grossly under-taxed.

As I suggested in my response to the TPA report, it might make more sense both economically and politically to use some of the revenues generated from a residential LVT to fund cuts to NICs, rather than replace the entire revenue currently generated from the Council Tax. The potentially damaging effect of LVT on house prices in high income areas would be somewhat counteracted by the economic benefits of reduced NICs. This would be one way to increase the taxation of residential land without crashing the economy or increasing the burden of tax on high earners living in expensive locations.

But as the rate of any tax on residential property will initially be relatively low, land will continue to be undertaxed for the foreseeable future. What we need is a roadmap which sketches out a route by which the effective tax rate on residential land can rise to match the effective rate at which commercial land will be taxed once the business rate has been replaced (on a revenue-neutral basis) by a commercial LVT. Stages along this road could include removing or reducing the CGT/IHT exemptions, accounting for imputed rent for the purposes of income tax, and reforming the planning system so that local authorities can collect a larger proportion of planning uplift.

However, as CGT and income tax are both economically inefficient, the smarter longer-term objective would be to incrementally raise the rate of residential LVT/PPT. The immediate imperative of reforming the existing system of residential property taxation is only the first step on a much longer road. This is the road along which we will need to travel if we are to extricate ourselves from the fiscal, macroeconomic, and general economic mess in which we currently find ourselves.