Rarely have the prospects for the prime property markets potentially been so dependent on the tax policy adopted by a future government, making it impossible to give a single forecast for the UK’s prime housing markets without a plethora of assumptions and caveats. Much hangs on the fate of proposals for a mansion tax.

Increased tax burden

Already we’ve seen previous increases in the tax burden on prime property curtail price growth in London, interrupt the flow of wealth into the prime regional and country house markets and create a two tier market above and below a £2m price threshold.

Although there have already been increases in the rate of stamp duty for high value homes, the introduction of annual charges targeted at those perceived to be avoiding other taxes and a clampdown on property owning non-doms, two of the main political parties have proposals for a loosely described ‘mansion tax’. This has compounded buyer caution. The prime market does not like uncertainty. Whether a mansion tax is introduced, what form it might take and how much it will cost are all uncertain.

"We believe the focus may shift away from mansion tax towards council tax reform"

Known unknowns

What we do know is both Labour and the Liberal Democrats have moved away from the original proposal for a tax at 1% on the value of a property in excess of £2m, not least because of the difficulty in establishing precise values for the 97,000 properties we believe could be affected. We also know Labour favours a progressive charge levied by reference to different valuation bands with properties valued between £2m and £3m paying no more than £3,000 per year.

Furthermore, we are told Labour aspires to raise in the order of £1.2bn annually from such a tax. This enables us to estimate how much households would have to pay for properties over £3m, having made an assessment of the number of properties that fall into different value bands using a combination of HMRC and Land Registry sales data.

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The calculation is complicated by a stated desire to have a higher, as yet unspecified, charge for overseas second homeowners whom we estimate account for 17% of the prime central London market and 6% of the prime London market as a whole.

We have assumed the additional sums raised from these owners are applied to offset tax leakage from both Stamp Duty Land Tax and Inheritance Tax that are likely to result because of the impact of a mansion tax on the market.

Possible structure

We estimate that there are around 40,000 properties valued between £2m and £3m, 30,000 between £3m and £5m and another 17,000 between £5m and £10m. To raise £1.2bn, the tax charges for properties worth between £3m and £5m might be in the order of £7,000 per year, rising to £125,000 for properties over £20m.

Because of the expected graduated scale of charges it is likely that a mansion tax will have different impacts in different parts of the market, potentially having a more modest effect in the lower bands. Correspondingly, it has the potential to have more of an impact in prime London than in the lower value prime regional markets.

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Market impact

Theoretically, this impact can be modelled in some of the lower bands by calculating its impact on the amount buyers can borrow. However, the market is unlikely to be this rational, particularly in the short term.

We would expect price falls to initially reflect a change in sentiment. Thereafter, we would expect values to recover to more accurately reflect the financial impact of the liability.

Although all the indications are that, if introduced, the tax would be confined to properties worth in excess of £2m, it could have a trickle down effect into other parts of the prime market. But it is likely that this effect will be offset by buyers looking to meet their requirements in lower value markets without a fiscal penalty.

In particular, it may draw demand out of London to prime regional property. As a result, the impact would be much less acute for the far greater number of properties which are valued between £1m and £2m, though their capacity for five year growth is more affected by the rising cost of mortgage interest.

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Back to fundamentals

We should also be mindful of the difficulties in administering such a tax. Its likely inefficiencies as a revenue raiser have already drawn criticism from a number of sources including 
a number of Labour MPs and donors.

This means that even in the event that further taxes are introduced, the measures may well be further watered down. We believe the focus may shift from raising an arbitrary amount of ‘mansion’ tax in a fairly crude manner to ironing out the inefficiencies of the existing council tax system, by introducing further bands at the top end of the market as we discussed in our Spotlight on Prime London.

This would have a far less severe 
impact on the market and, dependent on the wider economic and fiscal backdrop, result in performance far closer to that supported by the other market fundamentals.

Taken from
Residential Property Focus Q4 2014