The mansion tax: a patently bad tax that won't just hit the 'rich'

The mansion tax has been sold to us as a tax on the rich. But as Merryn Somerset Webb explains, it won't just be the rich who will end up paying it.

We've written here several times about the mansion tax. It is interesting because it is effectively a location tax (see previous posts on this). But it is also a shockingly bad idea because it doesn't replace any of the bad taxes we already have. It just piles on top of them.

Advertisement - Article continues below

So, we get stamp duty, we get inheritance tax (some people consider this an income tax on the living, some a property tax on the dead), we get council tax and we get the new mansion tax.

Like all new taxes, this one has been presented by the government as a tax on the rich, and only the rich. But of course, as always turns out to be the case, this is absolute nonsense.All taxes eventually trickle down until they are paid by all but the homeless and destitute (witness income tax). And so it will be with the mansion tax.

Knight Frank has just done an in-depth study of the £2m-plus property market in the UK (the Lib Dem idea is to tax only those for now) and found that, without extending the tax down to at least all houses costing £1.25m or raising it well above 1% a year, there is no way it will raise the £2bn claimed. Taking it down to £1.25m would mean that around 140,000 households would pay the tax. And that's just in the first year.

Advertisement - Article continues below
Advertisement - Article continues below

Most people will by now be familiar with the concept of fiscal drag (the main means by which our government manages to regularly increase its tax take). Assume that this will be used as much as possible with the mansion tax ie, that the limit for it will not be raised in line with house-price inflation and even if the threshold were set at £2m, there would be 775,500 houses paying the tax within 25 years (that's all houses currently worth £540, 000 or more).

When does your home become a 'mansion'?

The impact of 'fiscal drag' on the number of properties affected by a mansion tax
Number of years following the introduction of the mansion taxCumulative house price growth*Current value of properties caught by a static £2m threshold £Number of properties caught by a static 2m threshold
Introduction year0%£2,000,00055,000
5 years30%£1,540,00095,200
10 years69%£1,185,000157,300
15 years120%£910,000240,900
20 years185%£700,000419,200
25 years271%£540,000775,500
Source: Knight Frank Residential Research, Land Registry, HMRC, Nationwide
* Assuming the same level of future growth as seen over the last 25 years

Source: Knight Frank

Would all those people be rich? Possibly. But the ownership of a £540,000 house with a mortgage would be a pretty flexible definition of rich (Knight Frank reminds us that the Help to Buy scheme goes up to £600,000).

The truth with this tax (as with all taxes) is that it is designed to look like an attack on the undeserving rich. However, it actually puts in place the infrastructure for a tax attack on the middle classes. Knight Frank, like all estate agents, is obviously predisposed to loath the mansion tax, but their report does still raise all the right points. This is a transparently bad tax as it currently stands. The Lib Dems should give it up.




What are the best ways of raising more money in tax?

Given that whoever wins next week's election will be going on a massive spending spree, we're going to need to raise at least some of that money throu…
5 Dec 2019
Investment strategy

What are the biggest mistakes investors make when it comes to tax?

The tax implications of an investment are something we rarely consider until after the event. That could prove to be an expensive mistake, says Domini…
27 Nov 2019

How tax has shaped the course of human history

Taxation is as old as civilisation itself. But how much is too much? Dominic Frisby looks at how taxation, war and society have evolved together over …
16 Oct 2019
Small business

An update for the business-rate support scheme

The government has added £600m to plug the gap in its small business rates relief scheme for businesses in shared-office buildings.
5 Jun 2020

Most Popular


These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020

Disease, rioting and mass unemployment – so why are markets soaring?

Despite some pretty strong headwinds in the last year, America’s S&P 500 stock index is close to all-time highs. John Stepek explains why markets seem…
4 Jun 2020
EU Economy

Why a stronger euro is good news for investors

The fragile state of the eurozone has for a long time brought the threat of deflation. But the ECB’s latest moves have dampened those fears. John Step…
5 Jun 2020