Date Published 02 March 2015
We found this tremendously well-written deconstruction of Labour's plans for a Mansion Tax in an earlier edition of The Estates Gazette. It was written by Derek Wood, a QC in Falcon Chambers, and makes excellent reading!
An interesting aside around that same issue, it appears that David Cameron is now ahead of Ed Milliband in the Bookies Odds for ‘Who Will Be Prime Minister After The Election'. (http://www.oddschecker.com/politics/british-politics/next-uk-general-election/prime-minister-after-general-election).
Don't hesitate to call us at John Wilcox if you would like to discuss any of these points.
Making Sense of the Mansion Tax
The 2015 election campaign will not be the first in which all parties will be promising to outstrip their rivals in support for the NHS. At the 2014 Labour Party conference Ed Miliband announced that a Labour government will introduce a tax – a so-called Mansion Tax – on homes valued at more than £2m.
Ed Balls has recently stated that the tax will be charged at £250 a month on properties valued at between £2m and £3m; above £3m it is to be charged at 1% of capital value. The revenue from the tax will contribute to a 'Time to Care Fund' to help the NHS. He estimates that the Mansion Tax will put £1.2b into the fund. While welcoming the stamp duty increases on sales of expensive homes announced in the Chancellor's Autumn Statement, he confirmed that the Mansion Tax remains party policy.
The prospect of apparently rich property owners who live in 'mansion' making hefty contributions to the NHS will appeal to many voters. The threat of it has already caused concern among wealthy property owners. Faced with a 1% tax on his £7m home in Fitzroy Square in London, the entertainer Griff Rhys Jones has said he will emigrate.
Setting aside for the moment questions of equity, fairness and affordability, is the proposed tax workable in practical terms? It seems to be bedevilled with problems which will undermine any claim that it could support the funding of the NHS.
Identifying liable properties
The government will have two devise some means of identifying the owners of these valuable homes. The Land Registry can provide a list of all sales where the price last paid was £2m or more. However, that is only part of the picture. There will be many more where it was less than £2m, but the current value has inflated the value above that figure. Should the government then look at all registered sales, whenever they occurred in the past, and index the prices up to present day values? A desktop exercise of this kind will not capture physical changes to the property or its environs increasing its value after the property has been bought. The purchaser who bought a wreck at a low price and spent a significant sum restoring it will not be detected.
A search could be made of homes in the upper bands in the register of council tax payers. However, these bands are decades out of date and are no guide to current capital values. If, alternatively, a system of self-assessment is introduced, will this be conducted by everyone or by upper band occupants only? As Alistair Darling recently said in the Sunday Times, self-assessment will throw up a lot of properties valued at £1.9m, especially if they have been in the same hands for many years.
Even if bands rather than individual valuations are used, there will have to be some dispute resolution procedure if value cannot be agreed. An annual liability of £3,000 will depend on whether a property falls below or above £2m. If the value moves into the next band, above £3m, the levy starts at £30,000 a year and continues upwards. Valuations at this level will be worth fighting over and costly, time-consuming disputes will inevitably follow. Money spent on these will not be available for the NHS.
The concept of value is in itself more complex than it might seem. One may presume that it is the price which the property could be expected to fetch if offered for sale in the open market. The value of a freehold house occupied by the owner is ultimately a straightforward question. However, if it is subject to a mortgage, the value of the owner's equity may be a lot less than the open-market value; but that does not appear to be a ground for reducing the tax.
Ownership or occupation?
Where the property is let, it raises the fundamental question: is this a tax on ownership or occupation? Who will be liable to pay the tax?
Property taxes since the Poor Law Act 1601 have always been on occupation, which is true of business rates and the council tax today. The underlying legal title to the property – possibly stratified down from the freehold through a series of leases and subleases – is irrelevant. (Unoccupied property is treated differently.) Where the tax is based on the capital value of prospective taxpayer's interest in the property, there may be no taxpayer at all.
In London and elsewhere, there are flats held on long leases at ground rents worth more than £2m. In those cases, the value of the freehold reversion is nominal, and therefore outside the tax zone; but the leasehold interest will qualify. By contrast, it is unclear as to what happens when the freehold or leasehold owner lets to a tenant at a market rent. Such tenancies are unlikely to have any capital value, whatever the house or flat might be worth with vacant possession.
There are blocks where some flats are owned on long leases at low rents by the occupiers, and therefore potentially subject to the tax, with neighbouring flats let out by investors at market rents. Owner-occupiers will think it odd if no one pays tax on a flat or house that is let.
To meet this objection, Balls says that investors will also pay the tax. That makes it look much more like a tax on ownership rather than occupation and opens up the daunting prospect of valuing every interest in a house or flat held on any type of tenancy or lease. This will create significant further workload for HMRC.
Will investment values be based on vacant possession, or subject to the tenancy? Anomalies between the tax imposed on comparable properties owned and occupied on different terms will somehow have to be avoided.
Also, if property investors, great or small, who carry on the legitimate business of letting houses or flats to tenants at market rents, and pay corporation or income tax like other investors, have to pay a mansion tax on top, it will be hard to justify exempting investors in commercial property from the same tax. Residential landlords are unlikely to be able to pass the tax on to tenants who are already paying a market rent. The impact on the property investment market is easily predictable.
Mixed-use properties raise other questions. Commercial property will not be taxed, only homes. Someone will have to apportion the capital value of the traditional shop or office with flats above. People who work from home will have to be thought about. So too will working farmers who own their land and live in the farmhouses in desirable parts of the country, such as the Cotswolds. The NFU will be watching.
According to Balls, the tax will respond to changes in property values. As market values go up, the threshold will also rise, so that the number of taxable properties will not increase. Those who are exempt from the tax today will always be safe. Their wealth may increase, but they will not be asked to share the burden of funding the NHS with taxpayers who are caught when the tax comes in. The more one thinks about this tax, the greater the puzzle.
Technical problems apart, it is not clear why Labour is intent on taxing this particular element of personal wealth. Nothing is said about luxury yachts, valuable works of art, other investments, or owners of two homes worth less than £2m each.
For owner-occupiers, their home is a capital asset – possibly their only assets – which does not produce income. But the tax has to be paid out of taxed income. Many people have homes, bought long ago, where the current value exceeds £2m simply because of price inflation. They will find it difficult to accept that they must now pay an annual levy for the privilege of staying there, even if they can afford it.
There will be many people who cannot afford it. People paying off mortgages or retired people on fixed incomes are unlikely to have £3,000 a year (much less £30,000 or more) as free money after tax to meet this liability. Balls says that a special concession will be made to those earning less than £42,000 who do not therefore pay the higher or top rate of tax. In those cases, liability will be rolled up, interest-free, until sale or death.
There may not be many homeowners with an income at that level living in £2m mansions. More will be in the bracket of £60,000 to £100,000. In London, some of those will have to find £30,000 a year, after tax, to stay in their present home. Whatever concessions finally have to be made, rolling up debt will not help. The NHS will lose the benefit of cash flow. If property is mortgaged, there may be negative equity when the time for sale arrives.
Resourceful owners who sell up, buy a house for less than £2m and invest the balance of the proceeds in other assets will be as wealthy as before but free from the levy. Others will take advantage of the rich complexities of our leasehold system, stratifying their title so that at no level is there an interest in the property worth £2m.
Cancel tax reform
It is not known what effect this tax will have on the market. Economic modelling is needed. If the market for expensive homes takes a hit, that will affect stamp duty, estate duty and revenue from the mansion tax itself. Activity in carrying out improvements will slow down, where money spent on improvements will add to value. Restoring wrecks will be a hazardous enterprise.
The distribution of tax burdens between householders nationality is notoriously unfair under the present system. The out-of-date basis on which council tax is charged works very much in favour of the rich. Labour would be better off commissioning the long-overdue review of that tax, taking account of the wide spectrum of values that exists today between all homes.
Although this traditional tax on occupation works its way through the economy differently from a centrally imposed capital levy, it carries far fewer technical and political problems and is likely to be more acceptable to a public that has grown up with it.
Derek Wood QC is a barrister at Falcon Chambers