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UK property industry does not support a mansion tax

There has been much talk about the introduction of a ‘mansion tax’ that would be payable on properties over a certain value. But the industry points out that in London and the South East of the country where properties are worth much more, owners would pay an unproportionally high amount of tax.

There is also talk of closing an alleged £1 billion stamp duty loophole whereby some super rich foreigners avoid paying the stamp duty tax by putting expensive homes in offshore companies, a move estimated to cost the Treasury up to £1 billion a year.

The case for a mansion tax is a weak one, according to Lucian Cook, director of Savills research, in a new report, Taxing Mansions: the taxation of high value residential property, published by the Centre for Policy Studies.

He says that it would be complex and inefficient, raising little revenue at great potential cost, and could hurt the asset rich, cash poor long term owners of high value property.

In particular, he says, top end property owners already make a disproportionately high contribution to tax revenues and the UK already has by far the highest property tax take of any OECD country. Property taxes contribute 4.2% of GDP compared to the OECD average of 1.8%.

Data shows that the highest 1.6% of residential property sales yielded £1.2 billion in tax 2010, the equivalent of 26% of all stamp duty receipts and last year’s introduction of the 5% stamp duty band for properties over £2 million will contribute a further £290 million a year.

Also the top 0.7% of housing stock held at death contributes 36% of inheritance tax receipts from residential property and the non dom levy, which will rise from £30,000 to £50,000 a year, already collects revenue from owners of high value property domiciled overseas.

In contrast, a mansion tax set at 1% of the value over £2 million would yield just £1 billion, or 0.2% of total tax revenues.

Cook says would unfairly target the income poor, equity rich and points out that 31% of properties in London worth over £2 million have been in the same ownership for over 10 years, and 15% over 20 years. Price growth has been 89% in the past 10 years and 426% in the past 20 years. So it would be both difficult and expensive to value all relevant properties and as there is little comparable transactional evidence. Valuations would also be vulnerable to extensive legal dispute.

He also believes that it would undermine London’s position as one of the world’s leading business locations. ‘If only a handful of the new class of international wealthy were no longer to come to Britain, the resulting loss of tax revenue would be far greater than that raised by this tax,’ he explained.

Analysis by Savills also finds that estimates of the level of stamp duty avoidance, primarily through off shore vehicles, are overstated. Detailed analysis of transactional activity suggests that this occurs in only about 10% of prime central London and just 4% in the rest of the UK. Tightening this loophole would only generate around £150 million.

‘The common perception is that owners of high value homes pay a disproportionately low level of taxes but this analysis really explodes this myth. A new annual levy such as proposed, with a fixed threshold, would really distort market dynamics and would penalise cash poor long term owners of properties that have passed the threshold by dint of house price inflation,’ said Cook.

Tim Knox, director of the Centre for Policy Studies, said that a mansion tax would strike at the heart of aspiration and of property ownership. ‘And be sure that it will, over time, spread to include more people as politicians seek new funds for their pet projects,’ he said.

‘Yes, there is a pressing need for reform to our tax system based around Adam Smith’s principles of fairness, simplicity, certainty and efficiency. Closing the opportunities for stamp duty avoidance would be a sensible measure. But for economic recovery, the UK does not need a new complex tax targeted at the aspirational and successful. It needs lower, simpler taxes aimed at encouraging, not penalising, wealth,’ he added.

Enness Private Clients, a leading large mortgage and high net worth specialist, believes that
the proposals are not only grossly unfair, but completely impractical and it has pointed out a number of complexities that would make any such levy unworkable.

‘There are a huge number of potential sticking points for any mansion tax introduction and in our belief it is likely to do more harm than good given the significant amount of cost that will be incurred in setting up such a scheme,’ said Hugh Wade-Jones, director of Enness Private Clients.

‘One such problem is how the government intends to value hundreds of thousands of homes and who is going to do it? Not forgetting that anyone owning a property around the threshold will claim to be under the mark and there will be nothing to stop people presenting their home in an undesirable way to reduce its value. We should also remember that value is subjective until a property is sold,’ he pointed out.

He explained that a large portion of properties that fall into the £2 million plus bracket are owned by trust and company structures anyway, so it would be hard for the government to establish exactly who is liable for the tax and enforce it for companies that are offshore and not subject to UK tax law.

Also there are problems in terms of gaining access to homes that are empty or those owned by foreign owners who only spend a few weeks a year in the property.

‘Given that property prices have doubled every decade for more than a generation, taxing those that may have a valuable home but little or no income is, quite frankly, nonsense. Like stamp duty the likelihood of the threshold being increased in line with house price inflation is extremely unlikely so in years to come this won’t just affect the wealthy, but will in effect be a tax on growing number within the country which is unlikely to be as popular as the current round of wealth bashing appears to be,’ said Wade-Jones.

‘Ultimately, the cost of setting up and maintaining such a levy would be astronomical and, in effect, it is trying to suppress one of the few positive areas of economic activity currently. We would be vehemently opposed to the introduction of any such tax and the Government needs to get away from a destructive mindset of taxing wealth and its creators if we are to stand any chance of economic growth,’ he added.

The British Property Federation said it can see the case for introducing targeted measures to ensure purchasers of high value residential property pay their fair share but it warned that any such changes should not be applied indiscriminately across UK property markets.

It points out that the dynamics and economics of the commercial property market are very different from the high end residential market, and the impact of a general clampdown could be disastrous, especially in regional commercial property markets.
‘It’s vital that the government correctly identify the target of any new measures aimed at stopping stamp duty avoidance by super rich foreign buyers of high end homes in the UK, and design them carefully to avoid collateral damage,’ said Peter Cosmetatos, director of finance at the British Property Federation.

‘Unlike high value housing, the commercial investment market is fragile, with weak confidence and limited liquidity outside central London, and the use of holding structures is widespread for a variety of commercial reasons, especially where there is, or may be, co-investment by a number of different parties. Any changes to the stamp duty treatment of property holding structures affecting the commercial investment market should only be made after thorough consultation with the industry, because they could have a dramatic impact on transaction activity, investment volumes and, ultimately, asset values,’ he explained.

‘In its enthusiasm to clamp down on avoidance elsewhere, the government must not forget the importance to the UK economy of rebuilding confidence and liquidity in the commercial property investment and development market,’ he added.

Nigel Lewis, property analyst at PrimeLocation, a leading property website for higher end properties, believes that the term mansion tax is actually quite misleading as many of the properties that stand to be affected by this levy are not mansions, but reasonably sized homes in desirable locations. He pointed out that in the London Borough of Westminster, for instance, there are 630 million pound homes for sale, of which 430 are flats.

‘It would be a very difficult and costly way of raising money. Existing data that would allow the government to establish which properties should be subject to this levy, that is council tax, is over ten years old, so the cost of working out which homes are really worth over £1 million or £2 million would be around £200 million, somewhat defeating the tax’s purpose,’ said Lewis.