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by GK Strategy 20th February, 2014
3 min read

Will We Get a “Mansion Tax”?

On Valentine’s Day last year, Labour’s leader Ed Miliband made a speech in Bedford in which he embraced Lib Dem policy on the introduction of a ‘mansion tax’ as a way of funding the reintroduction of a 10p starting rate of income tax – and creating trouble for the Coalition. (Well, he didn’t say the last bit, but less than a month later Labour put down a motion in the Commons trying to embarrass the Lib Dems into supporting the tax). Shadow Chancellor Ed Balls in his Party Conference speech confirmed the policy of “a mansion tax on properties worth over £2m, introduced in a fair way, so that foreign investors who buy up property in London to make a profit will finally pay a proper tax contribution to our country”.

What should we make of all this? Would a ‘mansion tax’ have a big impact? How much would it cost homeowners? Is it likely to be introduced? Here are some thoughts and views on what is most likely to happen.

David Cameron successfully kept the ‘mansion tax’ out of the coalition agreement so no-one in a £2m+ house need worry yet. But with a general election just over a year away all that could change. It will be a big political issue in London and the South East, where 86.4% of all £2m+ properties are located.The Lib Dems say it is the right policy and a vote-winner, though their polling figures are dire. Lord Adonis, the former transport secretary and current shadow infrastructure minister, has warned of a business backlash against the proposal and a number of London-based Labour MPs are reportedly against it.

Details on the ‘mansion tax’ policy are sketchy. The Lib Dem approach is based on it applying to the portion of residential value over £2m at a rate of 1% annually. So a £2.1m property would pay an extra £1,000 a year, while a £3m property would pay £10,000 more per year. The Lib Dems are also looking at the possibility of banding within the mansion tax, e.g. a £5m house may be taxed at a higher rate. Depending on the general election outcome, this is likely to be in the mix of the discussions afterwards but it is unlikely to be clarified beforehand. There may be a desire to do banding from both the Lib Dems and Labour, particularly as according to property agents Knight Frank, the proposed 1% raises £1.3bn, not the £2bn the LibDems claim. At Labour Party Conference last year, Ed Balls talked of “introducing a mansion tax on properties over £2m, introduced in a fair way, so that foreign investors who buy up property in London to make a profit will finally pay a proper tax contribution to our country”.

What will happen? Well, it’s really anybody’s guess. The next general election is up for grabs. Too close to call – for now at least. Throw in the fact that council tax revaluation is long overdue as well and the situation gets even more complicated. The current bands are based on valuations in England on what a property would have sold for in April 1991. There has also been talk in the past about increasing the number of bands. But revaluation is politically difficult and the current Coalition quickly ruled it out in September 2010. It would take a brave new coalition to revalue council tax bands as ‘losers’ always make more noise than ‘winners’. The same is true of extending the number of council tax bands.

Only if there is a majority Conservative government in 2015 are the risks of having a ‘mansion tax’ low. In our judgement there is a not insignificant risk that a future Conservative led coalition would have to introduce a ‘mansion tax’ as the price to pay for Lib Dem participation in a second coalition. If so, it would be done grudgingly and probably have some wide-ranging exemptions, particularly for the asset-rich and income-poor. We judge it highly likely that a Labour government or Labour-led coalition would introduce some form of ‘mansion tax’. While there is some internal opposition, Labour need the money it would raise for their 10p tax commitment (or if they finally realise this is not a well-targeted policy, undoubtedly for something else). Given the pressures and politics involved, 1% on properties on the portion valued over £2m with exemptions again for income poor households looks the most likely outcome with probably one or more additional bands at higher rates for higher value properties. It is judged unlikely that there would be appetite either to lower the starting value from £2m to £1.5m or £1.25m as it would catch too many households, or to seek to levy a starting rate higher than 1%.

Lastly, let’s not forget that the House of Commons would have to agree to a ‘mansion tax’. London has 73 MPs, and candidates will come under pressure in the run-up to the general election to say where they stand. Backbench power in a Parliament with a small or no overall majority either way could well scupper or radically change any plans.

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