Blog: The mansion tax – its likely impact
“As the next General Election appears on the horizon, the Labour Party has once again dusted off the idea of a “Mansion Tax”. At its annual conference this year, Ed Miliband’s plan to slap a levy on homes worth more than £2 million in order to raise £1.2 billion, which he said would “save and transform the NHS by funding 36,000 extra doctors, nurses and midwives”, it had the auditorium cheering in a standing ovation. Such a tax is a straightforward and popular move. So why has it also been called “very crude” by Nick Clegg, “hopeless and desperate” by Labour donor Lord Noon and “a tax on London” by mayoral hopeful Diane Abbott? The Institute for Fiscal Studies thinks the idea has a “sensible logic, but is misdirected”. We look at what is being proposed and what effect it might have on the property market both in London and elsewhere.
Who would pay it?
There are just over 108,000 homes in the UK valued at more than £2m, according to the property website Zoopla. Of these, 85,461 are in London, and a further 14,261 are in the south-east. In Wales there are just 87 homes that would be liable for the tax. One London borough, Kensington and Chelsea, would pay about 35% of the tax in total. If the Labour Party believes that it will raise £1.2bn, then that sum spread equally over 108,000 homes suggests an average of £11,111 per household per annum.
Labour’s model is expected to involve several bands with the tax rising with the value of the home, making it progressive in its impact. It has briefed a few basic details of this tax proposal:
1) The £2m threshold will rise in line with property prices, to stop more properties being drawn into the tax and prevent “fiscal drag”.
2) There will be protections in place for people who do not have high incomes but happen to live in an expensive property. This would probably involve letting owners defer the levy until the sale of the property, or their death, perhaps by using the proceeds of equity drawdown.
3) It will be a progressive tax, meaning that properties worth tens of millions make a bigger contribution than those just over the limit.
What effect would Labour’s proposed mansion tax have on the property market?
The mansion tax is likely to have the most significant impact at the time of its introduction as it will cause re-pricing at the margin, although there is no detail at present on how the valuation of a house will be determined. Council tax bands were set in 1991 and have not been changed since.
No-one expects a market crash based on the mansion tax alone, but a one-off adjustment would be likely as £2m+ houses will be re-priced at £1,999,999, and others would be likely to be split into multiple tenure properties each worth less than £2m. The supply of homes valued at around £2m would significantly increase as thousands who are “asset-rich but cash poor” are forced to move house. Ed Miliband’s parliamentary aide has already raised concerns on this score. Karen Buck, the Labour MP for Westminster North, said that she will only support the scheme if there are significant safeguards to protect her constituents.
We think that there is no reason to believe that it would worsen building rates and that there would only be a limited curtailing of building of new homes in London and South East. It is certainly no answer to the chronic housing supply shortage. The impact would be felt more in the pricing of new homes to allow for the future cost of the tax in the sale price.
Although the mansion tax is likely to have the most impact on London and the South East, it is unlikely that it would cause a significant number of the ‘super rich’ to cash in and move their wealth and businesses out of the UK, due to London’s other attractions. Yet it should perhaps be remembered that France saw huge capital outflows as a result of President Hollande’s fiscal regime.
However, it may be disingenuous for Ed Miliband to think that the Mansion Tax is a safe and easy way to raise £1.2bn for other political purposes. Fiscally, while the gross proceeds would be £1.2bn if an average 1% was charged on the value of a house over £2m, the net proceeds would be lower as it would be likely to reduce stamp duty receipts by £200m and inheritance tax receipts by £300m. In addition, the costs of administration would eat into the proceeds.
The economic case for a mansion tax is strong as winners would outnumber losers by a large margin. It would also remove an unwarranted tax break for the wealthiest families in the country. In 1990, the last year of the old rating system, the largest homes in London were paying rates of up to £10,000 a year (worth £21,700 today) while Westminster’s band H council tax this year is just £1,353.
It would arguably be better to scrap the current regressive council tax and distorting stamp duty and replace it with an annual progressive tax on the entire stock of homes, not just mansions. The UK is locked into a system that is incapable of registering the wide divergence of property values over the last two decades. It is illogical that homes built since 1991 are given notional 1991 values.
But this, of course, would not achieve the same political aim – the Labour Party wants to be seen to be “soaking the rich” as the mansion tax can be made to appear to do. Revisiting council tax and adding new bands is not on the agenda. It would not be popular across the whole spectrum, and thus would not be a vote-winner. What it would be is sensible and well directed.