An article in the FT yesterday pointed to some of the problems that the increasingly inevitable looking mansion tax will throw up.
At the moment, assuming the starting point for the tax is to be £2m, it seems that around 95,000 homeowners are likely to end up paying the tax (Knight Frank estimates) with the vast majority of those living in houses worth under £4m.
The main focus of the objections to the mansion tax idea so far has been the idea that a good many of the people living in these houses aren't exactly rich: one third of Londoners living in £2m houses have, for example, been living in them for more than ten years (so may not have the kind of income that would allow them to buy them today).
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But this isn't as much of a practical problem as you might think all the parties pushing the new tax have come up with a deferral scheme of some kind to help the cash-poor or at least to limit the bad press on the imposition of the tax on the cash-poor. The real practical problem is how on earth you figure out how much a house is worth.
Do you take some previous valuation and compound it by average house price inflation? Do you just adopt current council tax bands and somehow take it from there? Do you waste many years of public servants' time looking at each house individually?
After all, in London two houses on the same street with the same floor space can differ in value by hundreds of thousands of pounds if one is refurbished to oligarch spec and one is not. It's tricky and endlessly open to dispute who wouldn't spend a few thousand pounds in a one-off fee to a property consultant in the hope of avoiding an annual bill of many thousands forever?
However you decide to do this, you have only just begun; the very existence of the mansion tax will distort the market and change the values of all the houses around the bands.
A nice reader (thanks, James) has done a few numbers for me. Let's say you have a house worth just over £2m and your mansion tax comes in at £5,000 a year. To see how much your house is now worth, you have to assume the tax is to be paid annually in perpetuity and so find the net present value of the stream of annual payments of £5,000, discounted back to today's money.
The best guide we have for the appropriate interest rate to use to get there is the yield on UK 'consols' (these are perpetual bonds they have no maturity date) currently 4.12%. That gives you around £120,000. So, a house worth just over £2m pre-mansion tax is now worth only just over £1.88m post the mansion tax. But a house worth £1.99m pre-mansion tax is still worth £1.99m.
You might think that it now makes sense for the owner of the £2m house to sell up immediately and buy a £1.8m house. Sadly, it isn't that easy. If they do, they will end up paying not far off £100,000 in stamp duty on their new house. Add that to the legal costs, estate agency fees and moving bill and it will all cost them about the same as they are soon to lose anyway.
I don't suppose either Labour or the Lib Dems are actively planning for the mansion tax to create new distortions and corruption in the housing market, but it seems pretty clear they are going to get them anyway.
If someone can claim, quite rightly, that their house is not worth £2m for the simple reason that the existence of the mansion tax has made it worth less than £2m, what happens next?
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