Is £2m enough to buy a London mansion?

So, what's happened?

On Monday, Labour leader Ed Miliband clashed with presenter (and former pop star) Myleene Klass on a television programme.

She criticised his plans for a 'mansion tax' on the grounds that many of those affected would be "grannies who've had these houses in their families for a long, long time".

She also argued that the tax would have a disproportionate effect on London, where four out of five properties affected would be located.

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Far from only affecting large houses, the tax would also catch much more modest properties in prime areas.

Indeed, she claimed that house prices have risen so much that in many parts of London, £2m (which is the proposed threshold for the tax) would only be enough to buy a property "like a garage".

Critics have jumped on her assertions to attack the proposal, with David Cameron claiming that "Klass wiped the floor with him".

Is Myleene Klass right?

It's clear that some boroughs of London have some extremely expensive property. Only a few weeks ago a garage with planning permission in Chelsea sold for £550,000, while a much larger one in south London sold for the same amount earlier in the year.

At the same time, the Land Registry puts the average price of a flat in Kensington and Chelsea at £1.1m, with detached houses going for over £5m. However, the average for Greater London as a whole is a much more modest £400,000, a fifth of the threshold.

Although property firms estimate that between 58,000 to 110,000 properties could be affected, this would still amount to less than 0.5% of the 25 million homes in the UK.

Separate data also suggests that two-thirds of those affected have lived in their home for less than ten years, suggesting that relatively few grannies will be affected.

How will the tax work?

Under the original Liberal Democrat plan, the idea was to levy a rate of 1% a year for any property over £2m, which would result in a minimum tax of £20,000.

Labour has indicated that those with values of between £2m and £3m will only have to pay £3,000, an effective rate of 0.1% for those with homes just under £3m. Since this would only raise £170m, it implies that those with more expensive homes will pay proportionately more.

Capital Economics thinks that this could be accomplished by charging everyone with homes that are worth more than £3m, £23,000 each. However, it thinks that a more likely solution would be "a tax of £15,000 on £3m to £5m, £30,000 on £5m to £10m, £80,000 on £10m to £20m and £150,000 on homes worth more than £20m".

Meanwhile, Miliband has pointed out that under Labour's plans, those earning under £42,000 a year would be able to defer payment until the property was sold.

How do such taxes work elsewhere?

A large number of countries around the world, including the United States, successfully levy substantial ongoing property taxes, so it's clear that the idea is workable, though not without its drawbacks and there are some major practical issues with the tax as currently proposed.

However, our editor-in-chief Merryn Somerset Webb has suggested a land value tax might be more equitable. The aim would be to tax the value of a property's location, which depends on social and physical infrastructure, separately from that of any improvements, which are the result of individual investment.

Instead of discouraging people from developing their land for fear it would push them into a higher band, it would penalise those who let productive land go to waste.