The idea of a ‘mansion tax’ has been used as a political football for several years but has re-emerged amid the jostling ahead of the next election. Championed originally by the Liberal Democrats, the premise is that any home worth more than £2million would be taxed at an annual rate of one per cent of its value above the threshold in order to bring in tax revenues of £1.7billion. The tax would be levied overwhelmingly on London and the South East of England, where eight out of 10 of £2million-plus homes are based.

Ed Milliband has also embraced the concept but wants to raise £2billion, stating that the previous “trickle down” approach to wealth distribution had failed. “We would use the money to cut the taxes for working people,” he announced.

Poor calculations

A recent report from property group Knight Frank, however, suggests both parties have considerably under-estimated the number of homes that would have to pay the tax.

It found that in order to raise the target revenue, the value threshold for the properties would need to be reduced from £2million to £1.25million. This would more than double the number of properties affected from 55,000 to 140,000.

Even if the threshold is not lowered, there is always the possibility – given that the £2million figure has been quoted since 2009 – that it would not be raised in line with future house price inflation. The threshold would then be so low that many flats in London and ordinary family homes in the South East would be caught. As it stands, 10 per cent of properties in London valued at over £2million are in fact one or two bedroom flats.

Over the past ten years property prices have risen by 69 per cent. Assuming a similar rate of growth in the future, all houses worth more than £1.2m today would be paying a mansion tax ten years from now, tripling the number of homes affected to 157,300. Over the next 25 years, the number of properties impacted by the tax would increase to 775,500.

While the Conservatives are not in favour of the proposals, who knows what deals might be struck to renew the existing coalition?

Winners and losers

Data shows that almost one third of all properties worth over £2million have been in the same ownership for over ten years. Many of the homeowners will have much of their wealth tied up in their property and would struggle to pay anything like the £2,000-a-month average mansion tax. And they will have to keep paying it, year after year; no matter if the individual stops working or their income falls.

Some would suggest they should sell up and move on but is it fairer that a wealthier investor, perhaps an overseas buyer, moves in?

Costly administration

The tax would also not take account of the size of the mortgage on a property making it difficult for people who have borrowed large sums of money on their dream home. Is the value of a property – simply a calculation of what someone is prepared to pay for it – really an accurate measure of a person’s wealth?

An expensive valuation exercise would need to be carried out, possibly in tandem with revisiting council tax bands. And as soon as the tax is introduced the value of the property will change. In America, where property taxes are common, homeowners have challenged valuations they do not agree with especially those teetering around the threshold, leading to costly judicial reviews.
What’s the alternative?

The most accepted suggestion is to revalue the current bands of council tax. At present, in England it is levied in eight bands with the highest band for property valued over £320,000 based on outdated 1991 prices. It is an unlikely vote winner; the UK already has one of the highest property taxes (as a proportion of GDP) among industrial countries.

Other European countries have abolished their own ‘wealth’ taxes in recent years. Sweden put an end to its wealth tax in 2011 because it raised only £400million per annum but kept over £140billion of Swedish-owned capital outside the country. The French on-again off-again 75 per cent tax on the wealthy has been cited as the main cause of tax exile, fuelled in part by the publicity surrounding the departure of actor Gerard Depardieu.

Whether a mansion tax is ever established in the UK remains to be seen. We can be certain we have a year ahead of political rhetoric on the subject.

Let us hope whoever is in charge in the future gets the sums right. Denis Healy, Labour’s Chancellor of the Exchequer in the 1970s, once stated that you should never commit yourself in opposition to new taxes unless you have a very good idea how they will operate in practice. “We had committed ourselves to a wealth tax: but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.”