Please Note: This Article is 7 years old. This increases the likelihood that some or all of it's content is now outdated.

Two think-tanks this week, the Centre for Policy Studies and the Centre for Economic and Business Research, have condemned Labour’s proposed mansion tax, as a clumsy attempt at a long-overdue reform, but the Economist says Labour’s mansion tax is based on sound principles, even if deeply flawed in the details.

The council tax, which is an annual levy on homes to pay for local government, relies on property valuations from 1991. Therefore, says the Economist, properties that have most soared in value are scandalously under-taxed:

“A seven-bedroom house in Kensington worth £13m incurs a £2,100 bill, scarcely more than is paid on many two-bedroom flats. Even on the old valuation, the tax is regressive. On average, a house in a high band attracts a charge worth just 1% of its 1991 value, compared with 2% for a middling home”, Stuart Adam of the Institute for Fiscal Studies, told the Economist.

Their argument is that, unlike stamp duty, a tax paid on transactions, when a house changes hands, an annual council tax, does not discourage transactions and is easy to collect.

Labour wants owners of houses who, often through no fault of their own, as the values have increased so much since they bought, happen to live in houses worth £2-3m, to pay an extra £3,000 per year in tax, and much more for higher value homes.

Popular with the masses, (those living in lower value homes of course) the tax would raise around £1.2 billion for the exchequer, according to shadow chancellor Ed Balls.

Around 80% of properties caught by the mansion tax would be in London according to high-end property agents Savills, but in London £2m will not even buy you a proper mansion.

If Labour were to hit its revenue target on mansion tax, it would mean some high-end properties worth say £20m would be paying something like £125,000 a year – well over £10,000 per month. But on that basis, and as a proportion of the property’s value, it’s not a million miles away from what an average home owner would pay in council tax.

A much bigger problem for labour is one of implementing the tax efficiently. Valuation and administration would become the big issues and cost of collection. It could be boom times for chartered surveyors, and strenuous efforts would be made by professional advisors and developers to help their clients avoid the £2m cliff edge of the tax.

A far better solution says the Economist, and one that is being tried in Scotland, would be an overhaul of council tax. This would involve an update to valuations and the introduction of higher rate bands.

The downside to this for any government would be the expected back-lash after revaluation, as losers would include owners of properties of all sizes. Labour abandoned its planned revaluation in 2005.

Either way, these reforms would affect valuations as the market prices-in the increased future tax burden. Is now a good time for mansion owners to sell-up and buy an ex council house?

Please Note: This Article is 7 years old. This increases the likelihood that some or all of it's content is now outdated.


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