Why I hate the mansion tax

The sudden popularity of the Lib Dems after the first debate meant a sudden rush to catch up with their economic policies. But there is one policy – perhaps their most famous one – that people still don’t seem to get.

It is the mansion tax. An article in The Times today claimed that it will really do for the central London rich – what with the “stuccoed house” in a Notting Hill garden square and the rectory in Gloucester, lots of them will find they have two houses worth more than £3m, and will therefore be hit with a bill of “at least £40,000 a year.” Sounds nasty doesn’t it? But it isn’t quite right.

The mansion tax (to be set at 1% should Clegg end up with the power to force it through) doesn’t work like stamp duty, in that it is charged only on the amount over the threshold, not the amount below it. So if your house is worth £2m you don’t pay anything and if it is worth £2.5m you pay 1% of £500,000 – £5,000. That means that even those with two houses worth £3m each will be paying a bill of well under £40,000. More like £20,000 in fact.

Overall, says Henry Pryor, the average tax payable will be around £12,250 and a total of 80,000 houses will be affected.  So the tax won’t bother the under £2m market much (except at the margin – there will be high demand for houses priced at £1.9m) and it isn’t quite as dramatic as many commentators have suggested.

That said I still hate it. Not because I disapprove of taxes on property in particular (I am, for example, very keen for everyone to pay capital gains tax on gains made on primary homes). But because I hate double taxation. And the actual cost to the home owner in pre-tax income is much more than the average that Henry pinpoints. Odds are that anyone owning a £2m-plus house has already paid at least 40% in tax on the money in the first place. So £12,250 is actually costing him or her more like £20,500 in pre-tax income.

That’s a serious amount of money for even the well off to come up with – anyone who is remotely cash poor will have to sell up and move on, leaving most of London lived in by hedge fund managers and anyone who got out of Greece in time.

On the plus side, outside prime London, houses aren’t moving out of the £1m-plus bracket and into the £2m-plus bracket in a hurry. Recent numbers showed prices down 1.5% in the first quarter of the year, while mutterings from the likes of Next about how consumer spending is bound to slow post-election should remind us that government spending cuts won’t just cut the deficit: in the short term at least, they’ll cut most of our incomes too. Low interest rates may yet stop house prices falling as real incomes fall, but it is hard to see how they can support them rising.

  • JAW

    Why I hate capital gains tax on primary homes.

    It is easy to overlook the fact that capital gains tax is often no more than a tax on inflation. Admittedly property price inflation in recent decades has generally exceeded consumer price inflation, nevertheless since inflation is often primarily created by government mismanagement of economic policy, excessive increase in the money supply etc, it would seem unethical to tax the population for the habitual errors of chancellors of the exchequer?

    On a practical level, someone relocating because of a job or other necessary reason would sell their house, pay 18% tax on the inflationary gain, and then be unable to buy a replacement house of a equal value. Therefore capital gains tax on primary homes would be a serious inhibition to social and aspirational mobility.

  • Merryn

    JAW, you are right about inflation. I didn’t go into detail here as the blog wasn’t really about CGT but I definitely think that all capital gains taxes should be RPI linked.

  • JAW

    Merryn

    Understood.

    The RPI adjustment makes your position on capital gains tax more acceptable. Pre Chancellor Darling’s budget change to a flat 18% CG tax we used to pay 40% after RPI adjustment. If the UK were to revert to 40% tax many would have to substantially increase the size of their mortgages every time they moved house, or find extra capital, just to stay in a same value property.

    Where one primary home is being traded for another, capital gains on property are essentially illusory, mere paper gains… because generally all properties are simultaneously increasing in price and the gain is rarely liquid. A liquid gain is only made if an owner occupier makes the transition to the rental market, or sells without intending to buy anything else. That is perhaps where a fair and large CG tax could be imposed, for those inclined to that economic thesis?

    There is complete agreement on your views of the Lib-Dem Mansion Tax as a punitive form of double taxation.

  • Nick

    “Overall, says Henry Pryor, the average tax payable will be around £12,250 and a total of 80,000 houses will be affected. “

    That means this tax will raise approx £1billion.

    Yet the Lib Dem manifesto claims to be able to raise £1.7bn a year from this tax. Are you implying that Vince Cable’s numbers don’t add up (!) ?

    As an aside does anyone know how valuations will work. Laksmi MIttal bought his house in Kensingon Gardens for £70m in 2008. He’s no doubt refurbished it. What’s its value today for Mansion Tax purposes ?

  • Merryn

    Often his numbers don’t add up (though he isn’t alone in that among politicians of course). There is discussion about how many houses in the Uk are worth over £2m and so far no one has come up with a definitive answer so we aren’t really sure how much it will raise in the end. The £1.7bn number was put up when it was to be 0.5% on houses over £1m but clearly now it is 1% over £2m there will be a shortfall.

  • JAW

    The first principle of ethical taxation is that it should only be levied where there is ability to pay. Any Mansion Tax without a means test element would be completely arbitrary.

    Anyone who has watched Ruth Watson’s Country House Rescue program on Channel 4 will realize that quite a few paupers live in splendid slowly decaying mansions, the cost of upkeep plus death duties financially cripples most families in time. Many would be unable to pay the tax and the result would be the abandonment of the house, its fall into dereliction, or transfer to the commercial sector, division into flats etc. Would trusts, such as The National Trust have to pay the tax? If there are to be exemptions then mansions over £2M would change to trust status as a tax avoidance measure.

    A better directed tax would be an annual wealth tax on the so-called super rich individuals the tax is designed to catch.

  • Nick

    “The £1.7bn number was put up when it was to be 0.5% on houses over £1m but clearly now it is 1% over £2m there will be a shortfall.”

    The £1.7bn figure comes from the 2010 LibDem Manifesto (page 100) and is based on a 1% levy on properties over £2m.

  • Don

    I think the Lib Dem proposal doesn’t go far enough. There’s a lot of material online about using a Land Value Tax to replace a lot of other taxes that we currently pay. The idea being that you should tax unproductive property assets, which don’t add anything to the economy, whilst reducing income tax which is paid by people who work for a living and actually produce things.

    A tax system should be designed to encourage economically beneficial activity – hard work and entrepreneurship – whilst discouraging less beneficial activity – such as property speculation, the lazy collection of rents and the maintenance of dynastic wealth (think about the Duke of Westminster). The British taxation system enourages that latter. It would also be far more diffcult to avoid a land value tax than income or capital gains tax.

  • Don

    Continued…
    Also, if you only tax the land value you do not discourage building more houses or improvement of existing properties – if a central London plot of land has a two storey building or a six-storey building on it, the value of the underlying land is the same, so the tax is the same. However, if a new tube station is built 2 yards from your house, the land value would go up, so the tax would go up. Why should private individuals profit from government infrastructure spending without being taxed on it?

    The biggest drawback is that practicality of valuing land. This has already been carried out to some extent for Council Tax purposes, but this was clearly not a perfect system. However, the impact of Land Value Tax (LVT) could be so huge that it is worth the effort.

  • Don

    And finally…
    The double-taxation point is a good one, and introduction of the system would have to be tapered. For people at the beginning of their working lives, the greater LVT would be offset by income tax reductions. For older people closer to retirement they may lose out, and this is where the LVT would have to be tapered. For retired people, the LVT would act as an encouragement to move somewhere with lower LVT. This may sound unreasonable to some, but, taking London as an example, the reason why land is valuable in London is because there is so much highly paid work in London. When you retire, you no longer need to benefit of having a short commute, and other younger working people would benefit from proximity to work, so it seems a socially beneficial policy to encourage those who no longer need to be near to an economic centre to move slightly further away from that centre.

  • Ken

    All this mansion tax talk is just tinkering to further complicate an already overly-complex tax system. The purpose is not to raise the needed revenue but to create the illusion that a few rich folks are being soaked for the benefit of a huge number — who will then accept the bribe and vote LibDem. Shame that Osborne dropped his flirtation with a flat rate income tax plus VAT. Maybe it will be resurrected if we get a Tory gov?

  • Supermarine Blues

    What a ridiculously over-complex piece of attempted social engineering.

    Is “Don” a pseudonym of “Gordon the Moron” Complexity Brown?

  • Ken

    Land Value Tax? How’s that different to non-domestic rates and council tax? Seems to me to boil down to the same thing.

  • Merryn

    Nick – it could end up being even less – other estimates of the number of houses worth over £2m come in as low as 35,000. Though to be honest I’m not sure the owners of expensive houses will need to worry too much after today…

  • Don

    LVT needn’t be complex – it’s just the explanation of the reasons behind it that takes time.

    I don’t have access to the numbers, so exact levels would need to be fine-tuned, but an ideal (and not outlandish) system could work out like this:
    – 1-2%% tax on land value (not house value) of £200k and over
    – flat rate of income tax at 25% paid on everything over £15k (so no need for tax credits, as poor people wouldn’t be taxed)
    – CGT at 25%
    – Corp tax at 20%
    – low VAT, which is a nasty peice of double taxation which hits the poor worst of all.

    That’s much simpler than the current system, much fairer, and much less open to abuse, giving less incentive to avoid tax. It also rewards economically and socially beneficial activity, and would help prevent housing boom and bust.

    It’s the Silver Bullet – look up Fred Harrison’s work on the subject if you’re at all interested.

  • Andrew Montgomery

    Fred Harrison has been interviewed by and written for MoneyWeek on more than one occasion, so Merryn should be familiar with the case for LVT. The main objection to the mansion tax is that it doesn’t go far enough – but “mansion tax” is a much easier soundbite for politicians than trying to explain land value tax.

  • timber

    How will the value of a mansion be established for tax purposes-every year, I assume?
    HMRC currently require three valuations for CGT purposes,and they often argue even then. Anyone with experience of dealing with a District Valuer will know about this.
    Sorry, this tax is unworkable! The only way to value something is to sell it. The mansion tax is yet another complication to a horrendous tax system that will create work for legions of civil servants and surveyors.

  • Derek

    Under our current taxation system double taxation is entirely normal. Every time you pay for a pair of shoes or a restaurant meal or anything else subject to VAT you will find yourself paying tax on an item which you have bought using income which has already been taxed. In fact if you buy fuel you will be subject to triple taxation as you pay VAT on fuel duty on fuel cost. So the real villain responsible for most double taxation isn’t LVT — it’s income tax.

    In addition right now Council Tax is double taxing the land that you bought and the building that sits on it. At least LVT would only tax the land, so replacing council tax with LVT would actually reduce the incidence of double taxation which occurs with the current Council Tax system.

  • Edd

    The mansion tax (to be set at 1% should Clegg end up with the power to force it through) doesn’t work like stamp duty, in that it is charged only on the amount over the threshold, not the amount below it. So if your house is worth £2m you don’t pay anything and if it is worth £2.5m you pay 1% of £500,000 – £5,000. That means that even those with two houses worth £3m each will be paying a bill of well under £40,000. More like £20,000 in fact.

    im sorry what is mansion tax? is it 1% over 2m per year?

    ” So if your house is worth £2m you don’t pay anything and if it is worth £2.5m you pay 1% of £500,000 – £5,000. “

    or is this capital gains? im struggling to understand whats, what

    if it is money over 1% how do they work out the value, house worth 5m in 09 is less now and if it does have to be “valued” who would do it?

Merryn

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