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Taxing aspiration

The Labour party's proposed mansion tax has many implementation issues, but one of its effects may also be to dampen house prices, suggests Lucy Brennan

27 March 2015

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The Labour party's proposed mansion tax has many implementation issues, but one of its effects may also be to dampen house prices, suggests Lucy Brennan

The so-called mansion tax proposed by the Labour party is further evidence that owning a high-end property in the UK has become increasingly expensive. In that sense, mansion tax is in keeping with the current trend. The recent large increases in stamp duty at the top end are a case
in point.

It also used to be a common procedure for non-domiciled individuals to buy residential properties through a holding company, often for reasons of privacy and inheritance tax efficiency. However the annual tax on enveloped dwellings (ATED) introduced in 2013, has brought in additional annual charges that in some cases outweigh the benefits.

While ATED currently applies to residential properties worth £2m or more, from April 2015 it will apply to those worth more than £1m and from April 2016, it will apply to those worth £500,000 or more. The annual charges have also been hiked by more than 50 per cent. In addition to the annual ATED charge, there is increased CGT and stamp duty on property bought this way.

Slab taxing

Details of exactly how mansion tax will work have been patchy, although we know its indiscriminate nature would present difficulties. The Labour party has proposed a slab-based system with bands taxed at increasing rates above the £2m threshold.

The shadow chancellor, Ed Balls, has previously said that houses worth between £2-3m would incur charges of about £250 a month for their owners, and for properties above that, the charge would increase progressively in bands. While estimates by the large estate agents vary, the tax could affect 100,000 properties in the UK.

The Liberal Democrats last year proposed the introductions of further council tax bands for properties above £2m. However the current council tax bands and designations are based on property values from 1991, and for the tax to be fair, a massive revaluation exercise would be necessary. Even so, some have suggested that this would be preferable to Labour's approach as it is more workable, and because an overhaul of the council tax system is overdue anyway.

Under either proposed system, a major sticking point is that many have become unexpected property multi-millionaires, despite earning unspectacular incomes. The rise in house prices over the last several decades made it possible to become 'asset-rich' while remaining relatively 'cash-poor'.

Teething problems

Predictably this affects London most, where house prices in some areas have risen by an estimated 420 per cent in the last 15 years alone. Some people question the fairness of taxing 'high end' property when it is modest compared to houses in other parts of the country, and can't reasonably be considered a 'mansion'. A related point is that to manage the tax fairly, regular valuations will have to take place. This would be a huge operation if 100,000 properties are involved, and comes at additional cost to home owners.

There is also the major question of whether it makes sense to charge mansion tax on the mortgaged portion of the value of a property, and we have received no assurances on this. To do so would be to tax the person whose name is on the title deeds for the value of the whole property, even when their net interest in the property is much less.

Many people who are still paying mortgages may well not have a large disposable income, with a large proportion of outgoing costs dedicated to paying down that mortgage. Mansion tax therefore becomes an additional burden to those moving up the property ladder, and some people have called it a tax on aspiration.

Fairness also comes into question when people with similar levels of wealth might have chosen to distribute their earnings more widely, either investing in several properties (or other assets) or simply spending a much lower percentage of their salary on living costs, perhaps with no need for a family house.

Looking at the bigger picture, there is the possibility that a mansion tax, together with all of these increased costs associated with higher-end properties, will actually dampen property prices at the top end. Also in question is whether international buyers will look to places outside the UK when buying expensive homes, but we might not have reached that point yet. n

Lucy Brennan is a partner at Saffery Champness