House sellers 'should pay capital gains tax of 40 per cent'

Householders should pay capital gains tax of 40 per cent on the sale of homes to cool overheating property prices, a think-tank suggests today.

The Social Market Foundation also said council tax should be replaced with an annual property tax, while developers should be taxed for building on undeveloped sites.

The proposals come after the Treasury announced reforms of mortgages and housebuilding as part of Gordon Brown's statement on the European single currency this month. He said the "stop-go" nature of the housing market was a significant bar to euro entry.

Ministers are concerned that Britain has the highest house-price inflation in Europe. Prices rose by 25 per cent last year.

Mr Brown has tried to curb house price inflation, particularly in London and the South-east, by imposing a 3 per cent stamp duty on house sales above £250,000 and 4 per cent on sales above £500,000.

Tom Startup, the report's author, said fundamental reform was needed to dampen boom and bust and stop low- income families taking financial risks with excessive mortgages. The report called for reform of planning laws to allow big increases in housebuilding.

He said: "Low levels of new building are caused by volatile prices and a restrictive planning system. These low levels then cause house-price inflation, fuelling further demand for home ownership and exacerbating affordability problems for low-income households.

"The only truly effective means to tackle this problem is to increase taxation of home-owners, bringing it into line with the treatment of private landlords. Capital gains tax on home ownership and an annual property tax proportional to the value of the property would be necessary to reduce volatility and restore building levels.''

He added: "If necessary, such taxes should be offset by decreasing or abolishing council tax or stamp duty.''