UK mansion tax could affect thousands of ordinary home owners, expert warns

If a mansion tax is introduced in the UK on higher value homes the knock-on effects could prove disastrous for thousands of ordinary home owners, it is claimed.

Owners who still have mortgages on their properties or who have invested for their retirement in property and benefitted from the rise in values rise over time will be affected the most, according to Chestertons estate agency.

The Labour party, the Liberal Democrats and the Greens are all proposing some form of levy on higher value homes so any deal between the parties that sees Ed Miliband become the next Prime Minister would surely see a mansion tax brought forward, probably within the first few months of the new administration taking power.

For those with a mortgage, the levy would be an effective ‘tax on debt’, according to Chestertons Group chief executive officer Robert Bartlett. ‘Let's be clear, this is a wealth tax in every way but name. Details are scant on how it will work in practice, or how much revenue it might raise, but the threshold of what qualifies as a mansion would likely fall around the £2 million mark,’ he said.

‘We know the vast majority of these homes are in London and, while Miliband himself jokes that his current London home would fall into this bracket, it will be no laughing matter for thousands of ordinary Londoners,’ he explained.

‘Unless you are very rich, you are likely to have a mortgage on your home. Let's say your home is worth £2.5 million but you have a £1.5 million mortgage. That means your asset value is only £1 million, but you will be taxed as though you own the property outright. This would potentially make this tax the UK's first ever tax on debt,’ he pointed out.

He added, that even if the property is owned outright, perhaps having been bought with a mortgage which has now been paid down in full, then the mansion tax could prove problematic for many households.

‘Older householders may be particularly hard hit, especially if they are retired and on a reduced income. They are also less likely to be able to remortgage to release capital. They could be forced to sell up and downsize to avoid a tax they simply can't afford. In many cases they may have to move away completely if more affordable homes are not available in their local area,’ said Bartlett.

‘The implementation of a new tax with a threshold beginning at £2 million would also likely have an immediate impact on values. Properties worth around £2.25 million for instance could drop to under the £2 million threshold overnight, which could send many home owners into negative equity. Thus in turn the tax may not bring in as much as calculated,’ he explained.

He also believes the threshold could creep downwards. ‘It is very easy for a government to change tax thresholds and I expect that we will quickly see the £2 million fall, maybe to £1 million as they realise that the tax brings in far less than they ever expected and as the requirement for more tax take increases,’ he added.

 He also pointed out that there would be an impact on the Banks. ‘Those Banks with a large exposure to houses particularly in that vulnerable price range of £2 million to £2.5 million will need to be looking at their loan books very carefully if values start to fall. A rush to sell by those in homes worth more than £2 million could see a flood of properties on to the market and values suppressed as supply outstrips demand,’ said Bartlett.

‘We would be faced with a situation where the super-rich who are the presumed intended targets of this policy would be largely unaffected, while those who have planned for retirement by investing in property over many years will see their prudence undone at a stroke and, in the worst cases, forced out of their home,’ he added.

‘Faced with the prospect of draconian new taxes such as this coming in, we are certainly experiencing a bit of a hiatus in the market while home owners and would be buyers are waiting to see what the outcome of the election will be. Whatever its political make-up, we would urge the next Government to consider very carefully and consult widely across the industry before bringing in new policies that may have such a significant impact on thousands of people across the capital and the wider UK,’ he concluded.