Housing Taxation across Europe: changing for the better?

In this blog Jens Lunde from Copenhagen Business School and Christine Whitehead from the London School of Economics reflect on their recent paper, How taxation varies between owner-occupation, private renting and other housing tenures in European countries, reflecting on housing taxation across European countries and how housing taxation remains a highly complex area. 

Housing and land is once again rising near to the top of the taxation agenda in many countries as governments look for ways of raising additional revenue in a post COVID-19 world. Not surprisingly most of the discussion is around what might be politically acceptable rather than what would be best for the housing system. Yet in many countries, the housing tax system distorts decisions both with respect to tenure choice and the level of investment in housing, with significant negative impacts on productivity as well as on wealth and its distribution.  In this context economists see housing as an asset and therefore would like to see it taxed as other investment goods. But from governments’ point of view the main issues are, on the one hand, that it could be a significant source of additional revenue and, on the other, that voters are very sensitive to change. And from the owners’ perspective any increase in housing taxation will reduce property values and therefore leave them with capital losses.

In this published paper we explore some of these topics from a comparative perspective, examining some twenty European countries together with Australia and the USA as comparable developed economies.

The biggest issues have generally been around the relative tax position of owner-occupation as compared to private renting (as well as to other assets). In a tax-neutral world, economists would expect owner-occupiers to pay tax on income (included imputed rental income) but be allowed to offset the costs of gaining that income. Equally they would expect capital gains and inheritance to be taxed in the same way as other assets. This does not happen in any of our survey countries.  Rather, in most countries owner-occupation continues to be favoured as compared to private rental housing, particularly with respect to increasing values, which disproportionately benefits those with significant housing wealth.

Some positive changes?

Most of the emphasis has been on whether and how owner-occupation is treated more generously than private renting or indeed other assets – in that imputed income has almost always not been taxed but mortgage tax reliefs have generally been available. In 18 of the 22 countries in our survey there is no imputed income tax and in two of the others it is limited to second homes. Only in the Netherlands (and Luxembourg, outside our sample) is there a clearly defined imputed tax and in both of these countries the rates actually charged are so small as to be almost irrelevant (in principle property taxation could play the same role as imputed income tax but only Denmark has a tenure specific tax of this type. A small number of other countries have more general wealth taxes).

What has changed however is the availability of mortgage tax relief which was almost universal some years ago. Now, however, 13 countries in our survey have removed mortgage tax relief for owner-occupiers – except for some historic purchases; another (Belgium) has it only in one region. Among the eight where it is still in place a number have restricted the reliefs available and/or lowered the relevant tax rates. Only in Scandinavian countries is it still the norm but also at lower rates.

Why has it been politically possible to make such a change across so many countries? And why that change rather than the more rational approach of treating all housing as investment? The most obvious reason is political reality: interest rates have declined very significantly over the last three decades, so these changes could be made without mortgagors facing significant increases in nominal outgoings.

Of course this does not remove the distortions in the housing tax system – it just replaces one distortion with another. Owner-occupation is now usually being treated as a consumption good for tax purposes, while rented housing generally remains an investment. But even that is changing – in seven countries, four from Eastern Europe, mortgage tax relief for landlords is not available and in the UK for instance, tax reliefs are now being heavily restricted.

Other major distortions: capital gains tax and inheritance tax.

In most countries in our survey, owner-occupied housing continues to be exempt from two other major taxes: capital gains and inheritance taxes. These have major distortionary and distributional effects, especially in periods of rising house prices.

In our survey, realized capital gains on land and other assets are generally taxed. Only owner-occupiers pay no capital gains tax and this position has not changed over decades. The four exceptions are Portugal, Spain, Sweden and the USA.

One obviously politically sensitive reason for not charging capital gains is that paying the tax would stop people being able to purchase a comparable home. Even where capital gains tax is charged it is usual to enable those selling their principal home to roll over payments as long as they reinvest the money in their new home.  So again owner-occupation benefits.

The other major exemption is in relation to inheritance tax. In 14 of our 22 survey countries inheritance taxes are in place. However, typically, owner-occupied housing is treated differently from other assets – reflecting very significant pressures against taxing inter-generational transfers within the immediate family. In particular, spouses, registered partners and children are more favourably taxed (or often untaxed) as compared to other heirs. Similar rules often apply to gifts given during the owner’s lifetime.


Overall, while there have been some moves towards a more neutral system, housing taxation remains a highly complex area, where many relevant decisions are made for purposes unrelated to improving housing outcomes. Perhaps most importantly housing taxation reinforces existing inequalities in wealth distribution. Some more general movement towards more coherent systems of property and indeed wealth taxation would be highly desirable, not only for both efficiency and distributional reasons, but also because they could help fill the tax revenue gap. But such initiatives remain politically highly problematic.

Views expressed by the authors may not represent the views of CaCHE.


Date: February 24, 2021 10:06 am

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