Critically analyse the extent to which reform is necessary within the current system of property taxation.
Land and property tax have been around for many years, yet there has been much debate as to whether such taxes are still relevant. This is because most taxes are now being received from income and expenditure and so it is questionable whether the current system of property taxation is actually needed. This is especially so given the critique that has surrounded many of the property taxes and it is felt that unless changes are made to the current system, unfairness will continue.
Much concern has been raised over the years about the current system of property taxation. This is largely the result of the ambiguity that exists within this area as it is often very difficult to determine when property taxes are in fact payable. Regardless, an attempt to provide clarity to this area has been made by Adam Smith who laid down four maxims of taxation that would establish a just tax system. It is arguable whether these maxims have proven workable which is why this study intends to analyse the extent to which reform is necessary within the current property taxation system. This will be done reviewing academic opinion, case law and relevant legislative provisions through the use of primary and secondary sources.
Adam Smith’s Four Canons of Taxation
Whilst the majority of taxes are “levied on flows of income and of expenditure” (Mirrlees: 2011; p. 368), taxes on property ownership continue to be of vital importance to the economy. As such, it is integral that the property taxation system is effective and fair in order to prevent injustice from occurring (Macleod: 2013; p. 10). How this can be achieved is unclear since it is often very difficult to determine how property ought to be taxed. In order to rectify the confusions within this area, Adam Smith developed four basic principles of a good taxing system. These were known as the four canons (maxims) of taxation and consisted of; 1) equity; 2) certainty; 3) convenience and 4) efficiency. Hence, it became apparent from these principles that in deciding whether a particular tax should be imposed upon an individual, consideration must be given to its proportionality. Furthermore, it must also be established that the tax is “charged at a time which is most convenient to the taxpayer” and that “the costs of collection are as low as possible” (Tiley and Loutzenhiser: 2008; p. 10). If this cannot be ascertained, then the tax should not be imposed as this would generate an ineffective tax system that would be highly unfair to the individual. In effect, all property taxes must be justified for a good property taxation system to be maintained (Gordon: 2004, p. 506), yet this is not always the case. Reforms are thereby needed to many property taxations including inheritance tax (IHT), capital gains tax (CGT) and stamp duty land tax (SDLT) (Endacott: 2003, p. 2).
IHT is often being called a pointless tax on the basis that it can be avoided and is only being paid by those who fail to plan effectively (Wilson: 2004; p. 962). Because of the unfairness IHT creates, there have been many calls for its abolishment (James and Nobes: 1999; p. 218) since IHT fails to achieve the desired characteristics of a tax. The original objectives of IHT are neither being fulfilled since a more “equal distribution of wealth” (Champernowne and Cowell: 1998; p. 240) is not being established. Furthermore, when IHT was introduced it was said to be a tax for the “the landed gentry or the very wealthy” (Byers: 2006; p. 2), yet because more people now own property non-wealthy people also end up paying IHT. In effect, an unequal distribution of wealth is instead being created, which was not the original intentions of the tax. The abolishment of IHT would therefore prevent further unfairness from ensuing, though not all with such rigorous reform (Truman: 2007; p. 565). Instead, it has been argued that IHT should receive more publicity so that individuals will have the opportunity to seek advice in order to avoid it. Hence, it has been stated by Smith (2007; p. 1) that; “the tax always has been a voluntary tax” and so its abolishment would be unnecessary. This would allow for a fairer system to be established since individuals would have the opportunity to avoid IHT if they so wished. However, in order to avoid “various traps and pitfalls” (Davies and Grant: 1990; p. 3) careful tax planning would still be required.
Therefore, given that some people are less capable than others it is likely that IHT will continue to be paid unnecessarily unless it is completely abolished as illustrated in Lloyds TSB v Private Banking Limited as personal representatives of Rosemary Antrobus deceased v Peter Twiddy (2005) DET/47/2004/. Conversely, if IHT were completely abolished the tax system would be open to abuse since individuals and corporations would be able to convert income into capital as shown in C and E Commissioners v Total Network  EWCA Civ 39. Therefore, IHT should not be completely eradicated though some changes ought to be made since it is a “grossly unfair tax” (Endacott: 2004, p. 3) that does not comply with the four canons of taxation. It has been suggested by Thornton (2011, p. 13) that the introduction of an exemption on the main family home would be highly beneficial as it would prevent situations whereby the family home has to be sold merely to pay IHT. Another suggestion was also made to alter the amount of IHT payable depending on the relationship to the deceased (Williamson: 2004; p. 2). For example a child of the deceased would be required to pay less IHT than a niece of the deceased. IHT could also be replaced by an annual wealth tax (Reed: 2013; p. 1) as this would certainly conform to the original objectives of IHT by creating a more equal distribution of wealth (Atkinson and Bourguignon: 2000, p. 664). However, it has been said that this type of tax would be “unconstitutional because of lack of clarity about the rational underpinning its valuations of wealth” (Howard: 2012; p. 4).
Capital Gains Tax
CGT is a tax that is charged by the government on non-invested assets that have been sold at a higher price than they were bought for. CGT only becomes payable if the person is classed as a chargeable person; Reid v IRC (1926) 10 TC 673, and if the non-invested assets are capable of taxation; Cottle v Coldicott  STC (SCD) 239 (sections 2 and 21 of the Taxation of Chargeable Gains Act 1992 (TCGA). The amount that is to be charged will be dependent upon the profit that was received minus any expenses incurred; Garner v Pounds Shipowners and Shipbreakers Ltd  UKHL 30. Although some believe that CGT is considered an essential tax by some (Morgan: 2011; p. 1), others disagree and instead argued that it is unfair and fails to comply with the four canons of taxation. Hence, it was argued by Feldstein (1994; p. 1) that CGT is wasteful on the basis that it inhibits economic growth. It has therefore been suggested that CGT ought to be completely abolished since it penalises those “who are willing to forego current consumption to finance future prosperity” (Mitchell: 2010; p. 1). Arguably, if CGT was abolished economic growth would be achieved and individuals would have higher living standards. Nevertheless, given that CGT is not always payable it is questionable whether its abolishment would be entirely necessary because as stated by Lee (2010; p. 573) that; “in many cases a gain on the disposal of an asset will not be chargeable either because the gain itself is exempt or because the asset is not chargeable.”
Despite this, CGT does appear to be an unfair tax when it is payable since capital gains are subjected to double taxation. Consequently, the incentive to save and invest is reduced as investors will have to pay tax twice, which is widely discouraging (Stainforth: 2010; p. 2). This has an overall impact upon the economy since the economy needs a level of savings so that financial investments can be made as this boosts economic growth (OECD: 2007; p. 74). In order to ensure that the four canons are being adhered to, reform is inevitable. This is because “the tax system in the UK, like that of most modern economies, is full of non-neutralities which are hard to justify, wasteful, and ripe for reform” (IFS: 2011; p. 40). In alleviating this unfairness it would seem appropriate to reduce the tax rates imposed upon capital gains to the lowest rates possible (Kinsley: 2012; p. 1). Furthermore, the reduced rates should also be applied to “corporate equity to reflect corporation tax already paid and serious consideration should be given to re-introducing relief for inflation” (Adam: 2008; p. 236). In addition to this, CGT rates should also be aligned with those that are imposed upon earned income and dividends so that double taxation is avoided and tax breaks should be introduced for owners of business assets. Whatever changes are made to the current CGT system, it is important that the four canons are adhered in order to avoid creating an uncertain and unstable tax system. This is because, as put by Eastaway (2003; p. 18); “the UK tax system gets more complex each year as it is increasingly used to try to influence commercial decisions instead of merely to collect revenue.” As a result of this, taxpayers find it extremely difficult to calculate their tax bill, which is largely ambiguous.
Stamp Duty Land Tax
SDLT is another property tax that is in need of reform because of the fact that a person’s wealth is determined based upon their home. It has been argued by many that this is an unfair way to assume someone’s wealth because there two people that earn exactly the same wage, yet because one chooses to spend his wages improving his own, he is taxed more (Eric: 2010, p. 2). The four canons are clearly not being adhered to here and unless the high tax burden that is currently being imposed upon such individuals is removed, unfairness will continue to ensue. Accordingly, individuals should not be required to pay SDLT for every single property they own as this would impose injustice on those who need more than one property for work. Essentially, such individuals should not be forced to pay extra tax in such circumstances, yet it is arguable whether it should be completely abolished. It has been suggested that a wealth tax would be more suitable than SDLT: “welfare is increased if the revenue currently collected by stamp taxes on property transactions were instead collected by a land tax and the main argument against seems to be that the only good taxes are old taxes” (Weale: 2011, p. 1). Other changes that could be made include the introduction of SDLT for bulk purchases. This will remove any current barriers to investing in residential property and individuals would no longer be discouraged from purchasing multiple residential properties (Norman, 2011, p. 1).
It is clear from looking at IHT, CGT and SDLT that the current system of property taxation is in need of reform. All of these taxes fail to satisfy all of the four canons of taxation and are thereby considered unjustifiable. Great unfairness ensues as a result of this and many of the taxes are deemed irrelevant. This is especially the case in relation to IHT since it is argued that because it can be avoided it is pointless having it in place as only those who fail to plan effectively will end up paying IHT. Many suggestions for its complete abolishment have been made, though it has also been suggested that IHT should receive greater publicity so that individuals will have the opportunity to avoid it. Furthermore, an exemption on the main family home could also be introduced as well as different rates for family members. This would help to maintain a more equal distribution of wealth and greater fairness would follow. Suggestions for the abolishment of CGT have also been made on the basis that it is a wasteful tax and unfair to those who choose to spend their earnings on improving their family home. In reducing the unfairness the tax rates could also be reduced and aligned with those that are imposed upon earned income and dividends. Tax breaks could also be introduced for business assets and greater clarity and stability could be created. The abolishment of SDLT could also be made so that an individual’s wealth is not being determined by their family home and this could be replaced by a wealth tax. On the other hand SDLT could be reformed so that individuals do not pay SDLT for every property they own and a single payment for bulk purchases could also be introduced.
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