One of the risks to the prime London housing markets remains the threat of a mansion tax. Though the fiscal and economic case for such a tax is weak – much weaker than it was when first proposed by the Liberal Democrats in 2009 – it is undeniably popular with the majority of the electorate.

Irrespective of both the increasingly disproportionate burden of stamp duty that is borne by high value property and the successive tax changes that have closed previous tax loopholes, the fact that the highest value properties in Westminster only pay £14 a year more Council Tax than a two bedroom second floor flat in Weymouth leaves proponents of a mansion tax with political ammunition.

However, there does appear to be a consensus that the previous proposal for the tax – a 1% levy on the value in excess of £2 million – would have been unworkable. Hence, both the Labour Party and the Liberal Democrats have moved towards a banded proposal that draws on the precedent set by the Annual Tax on Enveloped Dwellings (ATED).

Click Figure 2 below to enlarge

There is, however, no indication of the amount of the charge under these revised proposals.

If it were to be of the order of scale of ATED, which was introduced to penalise those people seen to be actively avoiding other property taxes, it has the capacity to put a fairly sizeable spanner in the workings of London’s prime property market. If, by contrast, it simply plugs the hole in the Council Tax system, then the impact would be much more benign.

At the heart of this issue is whether it is designed to be a significant revenue raiser or a playing field leveller. A penal charge would in all likelihood result in a significant leakage in government revenues from Stamp Duty, Inheritance Tax and Capital Gains Tax. Given this prospect, the policy focus may well shift towards making adjustments to the Council Tax system.

In this respect, the issues with Council Tax are essentially threefold:

• The existing Council Tax banding system is based on valuations that date back to 1991. In the intervening period, prices in prime central London have risen by 612%, while they have risen by an average of 237% across the UK mainstream market as a whole.

• Consequently, the existing 
bands do not distinguish between very valuable properties and the merely expensive.

• The Council Tax rates, which are 
set at a local authority level, are disproportionally lower in the highest boroughs of London than across the rest of the country.

An equitable solution?

First, it might involve adding several additional bands at the top end of the market, albeit without having to undertake a full Council Tax band revaluation.

Second, it might impose minimum charges for properties in these bands, irrespective of the Local Authority charging structure.

What constitutes an equitable charge is, of course, entirely subjective. This said, it would be difficult to argue that all band H (highest band) properties should pay the average charge of around £3,000 per annum as a minimum. Further, it would seem broadly fair that all properties worth between £2 million and £5 million should pay £5,000 per annum, those between £5 million and £10 million, £7,500 per annum and those worth over say £10 million, £10,000. Additional receipts could be used to reduce the Council Tax burden of those suffering hardship or to fund specific housing projects.

This would mean the most expensive properties would be paying over 8.5 times the amount of council tax paid by the cheapest, without the inevitable fallout of a more aggressive tax on a sector where tax charges have already been ramped up in the past five years. The playing field would look more level.

Annual tax on enveloped dwellings

Click Table below to enlarge

Since a mansion tax was first proposed

•  5% Stamp Duty Land Tax (SDLT) on £1 million+ properties (up from 4%)

•  15% SDLT on £2 million+ properties bought by non-natural persons

•  ATED on £2 million+ properties held by non-natural persons

•  CGT on sales by non-natural persons

•  7% SDLT on £2 million+ properties

•  CGT on overseas owned properties with effect from April 2015

•  ATED regime extended to £1 million+ properties with effect from April 2015

•  ATED regime extended to £500k+ properties with effect from April 2016

CLICK Graph 3 BELOW TO ENLARGE

Taken from
Spotlight: Prime London Residential Market - Autumn 2014