Sajid Javid’s rumoured mansion tax risks further distorting the UK property market if not done right

Chancellor Sajid Javid has faced criticism from both estate agents and London MPs after apparent plans to hit larger properties with a mansion tax emerged over the weekend, writes Mike Scott, chief property analyst at Yopa.

Though an appealing idea in principle, raising additional tax revenue from people who are well-placed to afford it risks distorting the property market unless the details are exactly right.

Council Tax needs re-evaluating

The first and most basic problem lies with the difficulty in identifying the properties that will be subject to the tax. Though the initial whisperings of plans suggest only properties that are currently in the highest Council Tax band will be considered, every single one of those properties will still need to be valued in order to determine whether it is over the threshold for payment of the new mansion tax.

If the tax is proportional to the property value, then it won’t just have to be allocated to a band of values – as with the Council Tax – it will need an exact valuation. If it is based on price bands, then the whole exercise will effectively just be the introduction of new, higher bands for Council Tax (which has already happened in Scotland), and not really a new tax at all. In either case, there are certain to be a large number of appeals against the valuations.

The new valuations could be combined with the long-overdue Council Tax revaluation of all properties, since Council Tax valuations are very outdated and are currently based on what a property would have been worth in 1991 (2003 in Wales), even for properties that were built 25 years after that date. However, that would be a political hot potato, since it would create many losers as well as winners.

Thresholds

The next consideration must be the introduction of a threshold where no tax is paid below the threshold, but a percentage above the threshold, as is the case with Stamp Duty Land Tax. For example, if the threshold for the new tax is set at a property value of £1m, then the tax must only be payable on the amount by which the value exceeds that figure, and not on the whole value.

Otherwise, a large amount of tax will be payable as soon as the threshold is passed, and homes valued at a little over £1m will effectively become unsaleable, bringing the market to a halt. This will present a real problem in high value areas such as London and the South East.

This brings into question the issue of regional fairness. Some quite modest homes in London are likely to be hit by the new tax, while only genuine mansions will be affected in other areas of the country, including the north. Of course, this may mean the proposed “mansion tax” will appeal to the new Conservative voters in former Labour constituencies in the north of England, and whereas the Conservatives are being driven out of Labour-voting London already, so it may not necessarily be seen as a disadvantage by the Tories in terms of political popularity.

Finally, there is the problem of homeowners who are asset-rich but cash-poor, such as pensioners on a fixed income. A new tax may cause them real hardship, forcing them out of their family homes. If this plan comes to fruition, the government must ensure that the option to defer the tax payments until the property is eventually inherited or sold is included.

A “mansion tax” is a convoluted issue with many factors to consider, affecting many facets of society – not just the lives of the super rich. With the Budget not due for another month, it remains to be seen whether this proposal is truly on the horizon, but it is clear that this is not a decision the Chancellor will be taking lightly.

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