Rather than benefit the working majority, a mansion tax could, in fact, do the opposite, says Tony Hennessey…
Imagine for a moment that it is June 2015.
The Chancellor of the Exchequer, Ed Balls, is sitting at his desk in the Treasury, reflecting on all that has happened in the tumultuous six weeks since Labour took office.
Mr Balls has decided in his first Budget to introduce a mansion tax, a prominent feature in the Labour Party manifesto. It might raise £1 billion, possibly a little more; hardly a substantial contribution to the Exchequer. It would, however, play well with his constituency and others like it, where very few houses were likely to be worth anything like the £2 million starting point for the new tax to bite. It would be a blatantly redistributive impost and be a bold political statement. After all, it is hard to hide valuable bricks and mortar in an offshore bank account.
Now, cast your mind back to last year. In 2012 George Osborne, the current Chancellor of the Exchequer, raised the rate of stamp duty land tax (‘SDLT’) to 15% on transactions where residential property was acquired by a “non-natural person” (companies and certain other entities) and where the consideration exceeded £2million. Mr Osborne followed this up in 2013 with the annual tax on enveloped dwellings (‘ATED’) which imposed an annual charge on residential property valued at more than £2million held by a “non-natural person”.
In the gestation process of this legislation there has been a number of exemptions to the charge introduced so that, with one or two exceptions, it only really applied to owner occupied — or empty —dwellings. In any event, many of the better advised have “de-enveloped” such properties, to avoid the ATED (and the extension of capital gains tax (‘CGT’) to disposals of dwellings by non-UK tax resident “non-natural persons” in relation to gains accruing from 1 April 2013).
The 15% SDLT rate, the ATED and the extension of CGT were, if people wanted, relatively easily side-stepped. However, what the ATED had done was to bequeath quite a useful, pre-existing statutory mechanism for imposing a mansion tax. Much of the basis for giving effect to an annual tax on residential property was already on the statute book. Despite the naysayers it would be a relatively simple task speedily to introduce this law. The question of valuation a la Council Tax was a complete red herring. The owners of the property could carry out and pay for the valuation just as was required for the ATED. All the ATED needed to make it fit for mansion tax purpose was a general extension to all dwellings worth more than £2million, not just those owned by corporates and the like, an increase in the rates to an uncapped 1% and some tightening up here and there.
Of course, the very term “mansion tax” has always been a tabloid misnomer. While the £2million threshold really did apply to mansions outside of the capital, fairly modest flats in the best London post codes would be caught . Given the fact that it applied to whoever owned the dwelling it would be rather less of a voluntary tax than he thought the ATED was.
What should be at of utmost concern to any politician considering introducing a mansion tax is its implications. There is a real danger that a mansion tax could depress residential property acquisitions at the high-end of the property market. This, in turn, could deter people from trading up.
Owners of high-end property worth less than £2million could unwillingly find themselves within the threshold if their property rises suddenly in value (hardly unexpected in London). Anyone wishing to redevelop their property should equally be mindful that alterations to their property invariably push up its value, which could fewer depress the high-end market.
It’s also probable that foreign investment would decline. Non-doors often have multiple assets and the financial freedom to pick which jurisdiction they call home for tax purposes. Their affection for the UK could rapidly decline if a wealth tax which directly targets the global elite who reside in London becomes law. Everything from financial investments to restaurants in Mayfair would feel the pain.
Of course, surveyors valuing properties for their owners would get something out of it and, of course, further HM Revenue and Customs staff would be recruited to administer this tax. But the knock-on effect from fewer high-end property transactions would extend beyond estate agents, to fewer lawyers and removal men.
A mansion tax is undeniably seductive in a political climate where real income levels continue to decline. But rather than benefit the working majority, a mansion tax could, in fact, do the opposite.