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Mansion Tax article

What you need to know

The idea was taken up by Labour’s David Milliband...The LibDems have continued to press, unsuccessfully, for a Mansion Tax since coming to power as part of the coalition government.

Debra Stroud

I’ve heard of it, but what is “Mansion Tax”?

The origins of the so-called “Mansion Tax” go back to the Liberal Democrats’ Annual Party Conference in 2009 when Vince Cable proposed a 0.5% annual occupancy tax on homes worth over £1m. In November 2009, this proposal was revised to a full 1% tax on homes worth more than £2m. This idea was taken up by Labour’s David Milliband the following year and more recently by his brother and Ed Balls. The LibDems have continued to press, unsuccessfully, for a Mansion Tax since coming to power as part of the coalition government. 

What are the politicians offering?

Labour has promised to introduce a Mansion Tax if they win the General Election; the expected £1.2bn proceeds will help fund the NHS. Meanwhile, the Liberal Democrats appear to have dropped the idea of a Mansion Tax in favour of additional Council Tax bands at the top end. 
The Conservatives remain strongly opposed to any form of Mansion Tax. A number of economic think-tanks are also against the idea. Both the Institute for Fiscal Studies and the Adam Smith Institute have suggested a revised Council Tax system would be more efficient and fairer.

What are the exact details?

While Labour has promised to implement the tax, their current proposals are very light on actual detail:

• Homes valued at £2m+ would be liable for the Mansion Tax. The rate hasn’t been specified and it’s not clear whether it would apply just to the amount the property is over £2m - or on the total value of the property. There would be a substantial difference between the two.

• The £2m threshold would rise in line with average property prices to prevent more properties being drawn within the scope of the tax. Exactly how this would work in practice with regions of vastly different property value, has not been revealed. 

• It will be a progressive tax with possible bands mirroring those applied to ATED (Annual tax on Enveloped Dwellings), i.e. ranging from £2m-£5m, £5m-£10m, £10m-£20m and £20m+. Again, there is no hint of what the rates would be for each band; although Ed Balls recently stated that those owning properties worth £2m-£3m would only pay an extra £250 a month through this new tax. This implies that those owning properties valued at over £3m will pay substantially more (in order to raise the targeted £1.2bn).

• Labour will also look at asking overseas owners of second homes in the UK to make a larger contribution than owner-occupiers – again, no further detail on this.

• As with the Government’s tax on properties bought through companies (ATED), owners will be able to submit a self-valuation to HMRC. 

• A relief scheme - or allowing those on modest incomes (those falling below the prevailing higher rate income tax brackets) to defer payment until the property is sold - has been suggested to protect “asset rich, cash poor” households. The relief clause has been reported to allow owners of £2m+ homes on low incomes, to roll up their liabilities until they are clawed back from their estates when they die. However, again, there is no information on either idea. 

Details of the LibDems proposals for additional Council Tax bands at the top end (i.e. above the current top rate Band H) have not been published. 

What are the potential implications?

There are a number of issues connected to both Labour’s and the LibDems’ proposals:

• Fairness: a key premise of the Mansion Tax is that it will ensure that “the wealthy” pay their proportionate share of tax. However, the tax would not impact equally upon all owners of £2m+ homes. Whilst the genuinely income and asset rich might comfortably afford such a tax, the same could not be said for others; i.e. those who are not wealthy but who have seen the value of their homes rise over time. In this case, Mansion Tax may prove unaffordable and in some cases forcing them to sell – especially those whose income is only just over the proposed deferment threshold. Moreover, if the current Council Tax liability remains in place, this would exacerbate any financial difficulties. 

• Tax rates: although no confirmed figure has been publicly stated by labour, the £3,000 annual cap promised on properties valued at £2m-£3m implies a diminishing tax rate up to the £3m threshold. So a £2.1m property (assuming they were taxing the £100,000, as the value above £2m) would equate to a 3% rate while a £3m property (taxable amount = £1m) would equate to a 0.3% rate.  

• Location: a “one size fits all” approach for every location seems equally inappropriate. The average house price in London, for example, is much higher than the rest of the country and many flats would be caught by the tax, whereas substantial properties on large plots in the North could fall below the threshold. The same issue applies to the proposed raising of the threshold in line with average price rises – are these to be applied based on national or regional or local increases? Price growth in London is substantially different from that of the rest of the country.

• Cost of action: in order to assess fairly who will pay the tax, a value will need to be attached to each property. The last time this exercise was conducted was in the early 1990s to establish the basis of today’s Council Tax bands, a process which took around two years to complete. The DCLG estimated the number of private dwellings in England in 2013 at 19,075,000 - it is highly unlikely that any Government would undertake this in the current financial climate. Labour’s appears to think that by using a banded approach this will remove the need for detailed valuations. However, detailed valuations will be needed around the thresholds which are likely to be contentious.  Some home owners might be obliged to pay for their own valuations - which HMRC could challenge if it did not agree with them. In any event, there would be administrative costs in setting up and running a system to manage the new tax; this would reduce the revenue intended for the NHS. 

• Revenue: a key question is how many £2m+ homes are there currently? A quick search on the internet will reveal various guesstimates from a variety of sources – from estate agents, to property portals and the political parties themselves. The fact is that no-one knows for sure exactly what the number is. So how can we know how much tax will be raised – especially if the rates for the bands have yet to be set? HM Treasury estimated that in the tax year 2011/12 there were 55,000 properties valued above £2m, a figure which will have risen considerably, given house price inflation and luxury new homes development.

• Tax creep risk: as Governments face increasing pressure to generate money to maintain public services, there is a risk that the threshold of the Mansion Tax might be lowered.  This would further cast doubt on the presented idea that it’s a genuine wealth tax. We have already seen the lowering of the threshold for ATED and the CGT (Capital gains Tax) charge.
• Impact on property values: a major concern for homeowners is the impact on property values, especially around the £2m threshold. Buyer appetite may well evaporate for properties within a range above the threshold – perhaps up to £2.2m or £2.3m - which will see owners needing value their homes below £2m if they wish to sell. This could trigger a flurry of demand for these “below value” properties which could impact negatively on properties currently priced at just below the £2m threshold which buyers may look for discounts on. This in turn could muddy the waters with regard to future valuations. On the other hand, given that the Mansion Tax will be capped at £3,000 per annum for properties between £2m> and £3m, its impact on properties valued within this band may be limited – much will depend upon buyer perception and knowledge about the tax. 

• And another thing: by stating that the number of properties liable for the tax will not increase (thanks to increasing the threshold each year, in line with average prices) this suggests that Labour’s definition of a “Mansion” only applies to those properties above this value at the time of implementation of the tax. Owners of these properties will doubtless be considerably aggrieved to know that owners of properties which subsequently rise above £2m may not be liable. 

What should I do now?

There is currently too much uncertainty surrounding the Mansion Tax to be able to make an informed judgement about how to react to it. Firstly, we do not have sufficient detail about the tax rates which will be applied, nor how it will work in practice. Secondly, it is not possible at this point in time to predict who will win the General Election. Prudence suggests a watch-and-wait approach whilst at the same time preparing a swift selling strategy should Labour or the Liberal Democrats come to power next May!
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Nick has more than 20 years’ experience within the property research arena.

Nick Barnes

Nick Barnes

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