Rachel Reeves has been urged to “grasp the nettle” and kick off a wholesale revaluation of the nation’s homes for council tax in next week’s budget as she prepares to introduce a levy on the most expensive properties.

Council tax is charged based on valuations carried out in 1991. The Treasury is understood to have drawn up plans to update the value of homes currently in the top three council tax bands – F to H.

All properties above a yet to be determined threshold, expected to be set at £1m-£2m, could then face a flat-rate annual levy of perhaps £2,000-£3,000 in addition to their existing council tax bill. If implemented, the revenue from this charge – styled by some as a “mansion tax” – would go straight to the Treasury.

Helen Miller, the director of the Institute for Fiscal Studies (IFS), said a partial revaluation along these lines would make the system more complex.

“It has the air of trying to scrape a bit more money where you need it, as opposed to just grasping the nettle,” she said. “Once you’ve done that much revaluation, couldn’t you just revalue the whole stock, and then actually update council tax? If not now, when? How many more decades do we have to be saying we’re basing council tax on 1991 valuations?”

The deputy chief executive of the New Economics Foundation, Hannah Peaker, agreed. She said: “The government should absolutely be rethinking property tax, and not least because this is one of the most economically efficient ways to raise funds for our starved public services.

“But doing this in a haphazard way risks perpetuating the inequalities our current system creates. Instead, they should put in the hard yards to design a much bolder and fairer tax – and that starts with wholesale revaluation.”

Successive governments have ducked revaluation, fearing a fierce backlash from households that would lose out.

Some Labour MPs are concerned about the impact of the proposed measure on their constituents, with one pointing to the prevalence of “asset-rich, cash-poor” households.

Reeves has argued that those with the “broadest shoulders” will have to bear their fair share of additional taxes, but it is understood that where that threshold will be set has not yet been decided.

The policy, aimed at making the out-of-kilter council tax system more progressive, is expected to be one of a slate of measures aimed at raising significant revenue without breaking Labour’s manifesto tax promises.

A Treasury spokesperson said: “We do not comment on speculation.”

Adam Corlett, a principal economist at the Resolution Foundation, welcomed the government’s approach, saying it would help to make the system fairer. “It’s a good thing,” he said. “We have not made progress on council tax since the 90s and at the moment those in the most expensive properties are paying the least as a share of their incomes.”

He said the Treasury could levy the new charge on property owners, not tenants – unlike council tax – which he said would mark another improvement.

Estimates suggest that Reeves’s new property charge would bring in less than £1bn a year, depending on the threshold and the size of the levy.

The Institute for Public Policy Research last week mooted a much more radical approach that would raise £3bn for the Treasury, plus a further £1bn recycled into cutting council tax for those in less valuable properties.

Reeves’ plan is not expected to be introduced immediately, allowing time for householders to prepare. It is likely to include a “deferral” scheme whereby the cost could be met from a homeowner’s estate when they die, to avoid accusations of forcing older people in higher-value properties to sell up if they could struggle to meet the charge.

During the long and politically fraught run-up to next week’s budget, the chancellor cleared the way for a historic increase in income tax rates in direct contradiction to Labour’s manifesto, but it emerged last week that the idea had been dropped.

The Treasury claimed the change of heart resulted from better than expected forecasts from the Office for Budget Responsibility, though it also coincided with a fresh leadership crisis for Keir Starmer.