The idea is not new, having being first mooted by the Liberal Democrat party, but now the Labour party has declared it too is in favour but says it would make sure only rich property owners paid the tax.
One of the main problems is the threshold for the tax. When the idea was first discussed by the Liberals in 2009 the policy was to bring it in for properties worth £2 million or more but since then property prices in London have soared.
Indeed, according to real estate firm Knight Frank, a property worth £1.2 million in Kensington and Chelsea then would now be worth £3.3 million. So unless the proposed threshold was raised considerably many more owners would find themselves liable to the tax, most not particularly rich.
But Ed Balls, the Shadow Chancellor, has declared that the tax could be workable if there were a series of bands. If his party wins the general elections next year it would introduce a banding system and raise the threshold in line with price rises.
But the property industry is not convinced. ‘A mansion tax will be a tax on London and the South East. Policymakers may feel that moving towards a regime where levying more taxes on assets as well as income is necessary, but there needs to be more detail on how this will work, and perhaps some assessment of the unintended consequences on the Treasury’s other sources of income such as stamp duty, capital gains tax and inheritance tax,’ said Liam Bailey, global head of residential research at Knight Frank.
‘Because the tax is overwhelmingly faced by central London property the indexation of the threshold will be complex. Since the mansion tax policy and the £2 million threshold was first set out in late 2009, prices have risen by 12% in the UK, but by 65% in parts of central London, dealing with these local variations will be a challenge,’ he added.
He also pointed out that even a banding system would be problematic as average values for properties at £2 million plus have risen much faster than the national average in recent years. The introduction of mansion tax would have a disastrous effect on the entire London property market, not just those over £2million, according to Edo Mapelli Mozzi, founder of Banda Property.
‘Whilst I welcome the suggestion of a tiered system, and also any means to protect people, such as the elderly, who may inhabit large properties yet have a relatively small income, I still believe the introduction of such a tax will not just hit the wealthy, but will affect thousands of home owners, negatively impacting the entire London housing market,’ he said.
‘I believe that as a result of these tax changes, investors will pull out of the £2 million plus market to avoid their yields being crippled. Without significant disposable income to allocate to the new tax, they are likely to downsize to properties of around £300,000 to £1.35 million, either smaller in size or in a less pricey area. Any properties with a higher value that this will bring with it a risk of moving into the mansion tax bracket with capital growth,’ he explained.
‘Furthermore, similarly to the situation at the lower end of the market when responding to stamp duty thresholds, we anticipate householders whose property is in danger of approaching the £2 million mark, will be less likely to want to invest in home improvements for fear of reaching the threshold. This won’t just affect the property market but the wider economy. If home owners are not investing in improvements and upgrades to their home, the building trade will suffer,’ he added.
He also believes that competition in the lower end of the market would dramatically increase, pushing up prices of homes below the £2 million threshold and increasing competition for these properties.’ This will trickle down and make it more challenging for first time buyers, particularly in London, to get on the property ladder. This is not what politicians in support of mansion tax are hoping to achieve,’ said Mozzi.
‘We are already witnessing investors moving from the £2 million plus market to below this level, and we anticipate this will only increase as we move closer to the next general election, and anticipated confirmation of the introduction of this tax,’ he pointed out.
He argues that instead of introducing a mansion tax politians should look at a fairer stamp duty tax. ‘The existing slab structure is archaic. It causes unnatural cliff edges in the market, and is by no means a flat rate. It is extremely unfair at all levels for both buyer and seller. If a property is worth £260,000, for example, the seller will inevitably be forced to reduce the price to under the 3% threshold of £250,000, as no buyer is going to want to incur the additional tax involved. The vendor, therefore, is unfairly penalised by not receiving a price worthy of their property. The same applies further up the scale, at each bracket, due to this absurd structure, where a property worth £1 over the threshold will meet a new banding,’ he added.
He is calling for a tax system along the same lines as the progressive, tapered structure of income tax, whereby the buyer only pays the higher percentage on the amount paid that is above the threshold. For example, if a 3% stamp duty threshold is over £250,000 then a property sold for £265,000 will pay 1% tax up to £250,000 and 3% on the additional £15,000. ‘This seems a far more fair system, uncomplicated to roll out, and will mean properties valued around a threshold do not remain on the market for longer than necessary,’ said Mozzi.
Richard Barber, partner at prime central London estate agency, W.A.Ellis, also believes a mansion tax would have a massive impact on London and the South East. ‘Whilst many may believe that if a house is of this value, its occupier could afford this tax, the current market may suggest otherwise,’ he said.
‘For example, for an aspirational middle income thirty something who purchased a family home for £900,000 eight years ago in an ordinary Fulham or Wandsworth street of terraced houses, that house may well now have a price tag in excess of £2 million,’ he explained.
‘However, the mortgage interest is likely to spiral upwards in the next year. Meanwhile, income has quite likely remained relatively stagnant and yet if mansion tax is introduced as above, the owner will have to pay an extra £1,250 per month. Even if deferring the payment is an option, the annual charge will rack up against the eventual realisation price of the property,’ he pointed out.
‘One may say that this is a reasonable tax and that the increase in value over the last eight years is unjustified, and that the owners of these properties should indeed pay the government what amounts to a claw back on inflation. However, I would argue that it is the government's lack of building of affordable housing over the last 30 years that has helped fuel excessive property inflation. A house is also, in many cases, people's most obvious asset, however, there is no such tax on share portfolios, art collections or vintage cars, all of which have also enjoyed strong soaring inflation,’ he added.
Barber also believes that it could drive wealthy foreign investors to buy multiple properties with a price tag safely below £2 million, therefore increasing the pressure on the market below that level in London and the South East, to the detriment of indigenous owner occupiers.
‘The impact that this proposed tax will have on London and the South East is huge, and the ripples are already being felt within our market. It is time that Labour were open about their intentions so that the electorate can see that a future Labour government will undoubtedly aim to tax the wealth producers of this country disproportionately whilst simultaneously deterring foreign investment,’ concluded Barber.
