Why A Mansion Tax Works

[Neverland]

Tuesday, 20th September 2011

Why mansion tax makes sense

Ross Clark 5:25pm

Messy deals and fudged compromises: an inevitable feature of coalition politics. But that doesn't necessarily mean that the resulting policy will always be bad. As a result of grubby negotiations in Downing Street, it looks as if we might just end up with a change in direction of tax policy which should have been made years ago.

The battle over the 50 pence tax rate seems to be settling into an uneasy compromise: the Chancellor gets to abolish it possibly in 2013 ­ and in return the Lib Dems get some form of mansion tax, the levy proposed by Vince Cable on homes costing more than two million pounds. Ever the party of the land, many on the Conservative side are still bitterly objecting to any higher property tax. But they should grab the deal while they can. Not only that, they should go further and bring about a permanent shift in the tax burden from income to property. It is the only way to mitigate yet another hugely damaging cycle of property speculation.

Property -­ particularly of the residential type - is prone to speculation partly because it is so lightly-taxed. Buy a house and live it and, when you come to sell up, you will not owe the taxman a penny, regardless of how big the profits you have made. Moreover, the exemption on capital gains tax on a main home lasts for three years after you have moved out, so you can in fact earn capital gains tax-free profits on two homes at once. True, buyers pay stamp duty, but once you have covered that the only tax you will pay is the highly-regressive council tax. The highest band for council tax is levied on properties which were worth £320,000 in April 1991 which averaged across the country equates to a property worth approximately £950,000 today. If you own a £1 million house you pay three times the tax paid by the owner of a £100,000 house. If you own a £10 million house you still pay only three times the tax paid by someone living in a £100,000 property. While owners of £100,000 properties will be paying around one per cent of the value of their homes in tax every year, the council tax burden rapidly tapers off as you go up the house price scale. Second homes are charged at between 50 and 90 per cent of full council tax.

Compared with property speculation, going out to work looks a mug’s game. It isn’t just the 50 per cent rate which is excessive. Earn £10,000 a year and you are already on a marginal tax rate of 32 per cent: 20 per cent income tax and 12 per cent National Insurance contributions. No wonder during times of property boom millions of homeowners are able to reflect that their homes are earning more than they are. Low taxes make for inefficient use of property. Those who own it have a tendency to cling onto it even when they are under-using it or not using it at all, for fear of missing out on tax-free profits. Belgravia has become a network of ghost streets thanks to foreign speculators buying London property as what they see as a safe and tax-efficient investment. Property speculation has not just given us high property prices, putting home-ownership out of reach for many; it has also sucked money out of investment in wealth-creating industries.

You don¹t have to be a communist to see the attraction of higher property taxes. British homes are worth a total of £4 trillion. An annual tax of one per cent on the value of all residential property would raise £40 billion,­ a revenue stream which would enable 16 pence to be cut from the basic rate of income tax or, better still, allow employee National Insurance (NI) contributions to be abolished altogether, bringing a change which would reward work at the expense of speculation. Place a similar annual tax on commercial property and the government could take a huge step towards abolishing employer NI contributions, too.

True, there would be losers who don¹t quite fit the popular image of a property speculator: the fabled widows living in mansions who were cited as a reason to replace the old domestic rates with the poll tax in the 1980s. But then why should the tax system support the interests of elderly people who are living in houses too large for them and which are rotting around them? If you cannot afford to pay a tax of one per cent of the value of your home you almost certainly cannot afford to maintain it properly, either.

Would it be any bad thing if the over-housed were persuaded to cash in their profits and move somewhere smaller and if under-used second homes and abandoned houses were encouraged onto the market? On the contrary, it would take pressure off our housing stock and reduce the need for the mass house-building which so upsets Conservative voters in the shires. Far from being a hated policy to buy off the Lib Dems, a mansion tax ­- assuming it was balanced by a dramatic cut on taxes on income - could prove this government’s lasting legacy.

Its fairly rare that I might agree with anything in the Spectator, but I agree with this wholeheartedly

Therefore...chance of it becoming government policy....

,,,feck all

[right_freds_dead]

any tax, as long as its tax we can throw in the fire of denial.

[Butthead]

Its fairly rare that I might agree with anything in the Spectator,

+1

but I agree with this wholeheartedly

+1 !!

[newbie]

This is how you do it:-

Introduce the mansion tax at a level of GBP 5,000,000 to ensure that it doesn't affect too many people directly.

Next year reduce it to GBP 2,000,000, then GBP 1,000,000.

Then to be ensure everyone pays their share, reduce it to GBP 100,000.

Then cap it to make sure it's regressive like most other taxes.

[ShedDweller]

This is how you do it:-

Introduce the mansion tax at a level of GBP 5,000,000 to ensure that it doesn't affect too many people directly.

Next year reduce it to GBP 2,000,000, then GBP 1,000,000.

Then to be ensure everyone pays their share, reduce it to GBP 100,000.

Then cap it to make sure it's regressive like most other taxes.

And anyone over 65 has the option to either pay now or defer until the property is sold (charged at base rate +2%). Bye bye to the "Granny who has lived here all her life and is forced to move by taxation" problem ..

Forget it though ... it won't happen .. it would be an "Unavoidable tax" and as such does not have a hope ..

[leicestersq]

This tax needs to be morphed into a proper land value tax, replacing council tax. Tax the homeowners, with a progressive tax. Discounts for UK citizens, and an extra discount for UK couples if they own one house only. Penal rates for non-UK citizens and companies that own residential property.

The thing to do is make it progressive and UK wide. That way, if you have 2 houses, you lose your discounts, and you pay more tax in total on those 2 properties than two people would owning the same properties separately.

Such a tax smashes apart the buy to let model business model. No bad thing.

[newbie]

This tax needs to be morphed into a proper land value tax, replacing council tax. Tax the homeowners, with a progressive tax. Discounts for UK citizens, and an extra discount for UK couples if they own one house only. Penal rates for non-UK citizens and companies that own residential property.

The thing to do is make it progressive and UK wide. That way, if you have 2 houses, you lose your discounts, and you pay more tax in total on those 2 properties than two people would owning the same properties separately.

Such a tax smashes apart the buy to let model business model. No bad thing.

You can't discriminate between UK and other EU citizens. I agree that there should be discounts for owner-occupiers on their primary property.

[BearNecessities]

I disagree strongly with a mansion tax

Houses are highly illiquid as a measure of wealth.

Raise CGT and cut income tax, so they are at the same level and then charge CGT on all property sales. This could even be done retrospectively if sensbly tapered off.

[worried1]

This is how you do it:-

Introduce the mansion tax at a level of GBP 5,000,000 to ensure that it doesn't affect too many people directly.

Next year reduce it to GBP 2,000,000, then GBP 1,000,000.

Then to be ensure everyone pays their share, reduce it to GBP 100,000.

Then cap it to make sure it's regressive like most other taxes.

Yep, exactly the same as stamp duty. Back in the 80s you could buy a fairly average house without incurring stamp duty. I can't remember the last time I saw anything more than a bedsit in my area that would escape stamp duty now, and that average house is a few bands up.

[leicestersq]

You can't discriminate between UK and other EU citizens. I agree that there should be discounts for owner-occupiers on their primary property.

We should of course leave the EU asap. And as a nation, we have limited land and we are very overcrowded. We have every right to discriminate our land tax by nationality should we chose to do so. It is the government's resposibility to act in the best interest of the people of the UK, so permitting discrimination against non UK citizens.

Other nations in turn, have every right to discriminate against UK citizens. This is particularly true with respect to land within the borders of a country.

[Riedquat]

We should of course leave the EU asap. And as a nation, we have limited land and we are very overcrowded. We have every right to discriminate our land tax by nationality should we chose to do so. It is the government's resposibility to act in the best interest of the people of the UK, so permitting discrimination against non UK citizens.

Other nations in turn, have every right to discriminate against UK citizens. This is particularly true with respect to land within the borders of a country.

Sorry, any suggestion of the UK being overcrowded is absolutely forbidden on HPC.

[Blue Peter]

Does the mansion tax work on the last recorded sale price? So, the same house would or would not qualify depending upon when it was last bought?

I would think that an LVT, or greatly expanding the bands of council tax would be a better mechanism,

Peter.

[MRMX9]

If only the British people weren't so stupid they would be clamouring for this change.

Its not hard to do - just do some research on all the properties in band H in England and reallocate them into bands I, J and K. Most of them are in Richmond upon Thames, Westminster and Kensington & Chelsea anyway - so it won't require much work.

The current council tax system is obscene - my pensioner parents in a modest semi actually pay more council tax than someone living in a £30m mansion in Belgravia. Mainly because Westminster has such a low council tax as it subsidises this from its £100m a year parking revenue. And they get far worse services (and would pay higher charges for social care and home helps) than in Westminster too.

Property cannot move - its the easiest tax of all. It would also ensure all those oligarchs and Middle eastern billionaires pay something. Yet I keep seeing articles saying its unworkable - nothing could be simpler. We revalue every non domestic property in England every 5 years - valuing all existing band H properties should be a doddle!

As for the poor pensioner in a £2m home in Barnes who has no money - well she ain't poor and she can move to a £1m home in Kew and live on the £1m profit!

[LiveAndLetBuy]

I disagree strongly with a mansion tax

Houses are highly illiquid as a measure of wealth.

Raise CGT and cut income tax, so they are at the same level and then charge CGT on all property sales. This could even be done retrospectively if sensbly tapered off.

Houses can be highly liquid if you're renting them out. Also we should encourage investment in UK companies rather than UK property, hence increased CGT not such a good idea as it would affect both.

If a form of land tax were to replace income tax (a good thing) then maybe existing pensioners on low income should be exempt from land tax (they would not benefit from the income tax cut).

[leicestersq]

If only the British people weren't so stupid they would be clamouring for this change.

Its not hard to do - just do some research on all the properties in band H in England and reallocate them into bands I, J and K. Most of them are in Richmond upon Thames, Westminster and Kensington & Chelsea anyway - so it won't require much work.

The current council tax system is obscene - my pensioner parents in a modest semi actually pay more council tax than someone living in a £30m mansion in Belgravia. Mainly because Westminster has such a low council tax as it subsidises this from its £100m a year parking revenue. And they get far worse services (and would pay higher charges for social care and home helps) than in Westminster too.

Property cannot move - its the easiest tax of all. It would also ensure all those oligarchs and Middle eastern billionaires pay something. Yet I keep seeing articles saying its unworkable - nothing could be simpler. We revalue every non domestic property in England every 5 years - valuing all existing band H properties should be a doddle!

As for the poor pensioner in a £2m home in Barnes who has no money - well she ain't poor and she can move to a £1m home in Kew and live on the £1m profit!

Exactly. Make the tax progressive, so the burden falls on the rich. And that includes poor pensioners, they can go elsewhere.

A properly executed land value tax is almost impossible to avoid, and smashes monopolies of the land to pieces. People with little land pay little tax. If you get a lot of land (by value), then you get a tasty tax bill. You can avoid this by selling the land.

[Riedquat]

Exactly. Make the tax progressive, so the burden falls on the rich. And that includes poor pensioners, they can go elsewhere.

A properly executed land value tax is almost impossible to avoid, and smashes monopolies of the land to pieces. People with little land pay little tax. If you get a lot of land (by value), then you get a tasty tax bill. You can avoid this by selling the land.

If someone wants to buy it and pay the tax... On the face of it a land value tax sounds like a good idea but I'm concerned that it could have some unpleasant unintended consequences (although if those aren't as bad as the ones we've got with the current system, which shouldn't be too hard to achieve, then go for it). For example... Any land that's got planning permission has higher value than land that doesn't. The value of land depends upon its use, should it be valued at what it's currently used for irrespective of what it could be sold for? How does it work with land being held but not used by developers? Presumably it's being used by a farmer at present, so taxed on that or the fact that there's planning permission there? If the latter it should discourage hanging on to land banks, but would it encourage even more rabbit-hutch construction than at present? What effect does it have on industrial land and therefore business?

[Butthead]

I've thought of an amusing solution to the "how do you value everyone's property" problem.

Everyone values their own property and submits the value. They pay tax at 1% of this.

BUT!

If selling the property they are taxed at 40% on the difference between the sale price and their declared property value (indexed for CPI).

This would make most people value their property sensibly so obviously wrong values would stand out like a sore thumb, and you could then have an assessment process for those...

[Democorruptcy]

This is how you do it:-

Introduce the mansion tax at a level of GBP 5,000,000 to ensure that it doesn't affect too many people directly.

Next year reduce it to GBP 2,000,000, then GBP 1,000,000.

Then to be ensure everyone pays their share, reduce it to GBP 100,000.

Then cap it to make sure it's regressive like most other taxes.

In the UK it would start at <5m

Then >1m and < 2m

Then just < 1m

[Lepista]

I've thought of an amusing solution to the "how do you value everyone's property" problem.

Everyone values their own property and submits the value. They pay tax at 1% of this.

BUT!

If selling the property they are taxed at 40% on the difference between the sale price and their declared property value (indexed for CPI).

This would make most people value their property sensibly so obviously wrong values would stand out like a sore thumb, and you could then have an assessment process for those...

so if you have no intention of ever selling, why not value it at £1?

[leicestersq]

so if you have no intention of ever selling, why not value it at £1?

Because as he suggested at the end, it would stand out like a sore thumb, and then go into formal assessment.

Trouble is I dont see how you could fine someone for getting this assessment wrong, so you can have a free go at getting it wrong if you are not going to sell. This policy would also encourage people not to sell because they have gamed the tax.

[Butthead]

Because as he suggested at the end, it would stand out like a sore thumb, and then go into formal assessment.

Trouble is I dont see how you could fine someone for getting this assessment wrong, so you can have a free go at getting it wrong if you are not going to sell. This policy would also encourage people not to sell because they have gamed the tax.

I don't think you fine people massively for getting it wrong. Maybe a token charge to cover the assessment process if your value goes to assessment and is proven incorrect. I think the disincentive to cheat is the cost for selling in future and because that would be a disincentive for the majority it keeps the minority in line as they'd stand out otherwise.

It does encourage people not to sell for more than their rated value, but if they've lied they still get 60% of the spoils. You'd probably update values at sale for the actual sale price and include some sort of indexation or revaluation timescale so over time all values would be broadly correct. The self assessment just kick-starts things.

Edit: The registration of sale prices when sales happen also provides an incentive for the buyer to pay a lower price. They know they're going to be on the hook for 1% of whatever they pay per annum. You could make property rated values public information, so a potential buyer could say "but the rated value is £200k, why are you trying to sell it to me for £250k?" which again is an incentive to rate properly in the first place.

Edited September 21, 2011 by Voice of Reason

[Jason]

I like the idea of land tax, but being devils advocate I can see many problems.

If the owner pays the tax, what happens to renters? If it is the BTL owner (which I hope it is) they will try to increase rent to cover it. So we would need strong policies on housing benefit, and ensure it doesn't rise to just cover this tax. If rent doesn't rise, house prices would crash to compensate the investment returns, and if prices fall it would push the economy back into recession. Does it also means renters would pay much much less tax? Why ever buy a house?

You would need the gradual introduction, but it would only take some dick of a political party to mess the system up. If Labour were in charge, they would rely on the additional tax revenue and not reduce other taxes.

[CleverBear]

I hope the lib dems get their way with such a mansion tax

[Butthead]

I like the idea of land tax, but being devils advocate I can see many problems.

If the owner pays the tax, what happens to renters? If it is the BTL owner (which I hope it is) they will try to increase rent to cover it. So we would need strong policies on housing benefit, and ensure it doesn't rise to just cover this tax. If rent doesn't rise, house prices would crash to compensate the investment returns, and if prices fall it would push the economy back into recession. Does it also means renters would pay much much less tax? Why ever buy a house?

You would need the gradual introduction, but it would only take some dick of a political party to mess the system up. If Labour were in charge, they would rely on the additional tax revenue and not reduce other taxes.

It's crucial that it replaces other taxation, so a lowering of income tax (targetted at the lower end more) or removal of employee national insurance contributions would be ideal. This reduction in taxation means it doesn't matter if landlords pass on the tax, as they certainly would, as renters would have additional income to pay. The object isn't to skew the balance of buying/renting one property, it's to make owning unused property unattractive and providing an unavoidable tax to people who might buy hugely expensive property in London etc.

The housing benefit point is a good one, but that's a system that needs massive change anyway. Certainly no increase to cover the new tax!

[mercsl]

70% of the uk are home owners , turkies don't vote for Xmas so you lot can dream on ....

Why should I want to pay 4k a year rather than 1.2k a year in council tax on just my humble London flat? (based on the USA 1% property tax) . It would be like another mortgage then never ends.

Larger homes in nicer areas of the south east would be unwanted as normal people could not hope to meet the running costs, smaller places would be in massive demand with the price reflecting the saving in running costs over the years.

Btl would be even more popular , downsizers swapping one big house for several smaller places.

Why should someone who decided to put their already heavily taxed savings into their house (rather than pissing it up against a wall, flash holiday and sports cars) have to pay yet more?

Every pensioner should have the right to live alone in a massive house without undue financial pressure to move out.

Landlords would pass the tax on , everyone else will be doing it.

The notion they will reduce some other tax is totally naive, it will just be yet another tax to beat us with.

At an election all one party needs to do is say it will be repealed and they win

Edited September 21, 2011 by mercsl