The Mansion Tax: another failed idea that never dies
In original form, it was proposed that the owners of properties worth over £1m should pay an annual charge of 0.5% on every £1 of assumed value above that threshold. The Liberal Democrats calculated that, assuming no impact on prices, this would yield an average of £4,000 in additional taxes on just over 250,000 homes, raising some £1.1bn in revenue. In 2012, while in coalition with the Conservatives, the Liberal Democrats raised the threshold of the proposal from £1m to £2m, and the rate to 1%, claiming now it (and wider wealth tax changes including a tax on jewellery) would raise £1.7bn. The Conservatives refused, preferring their own Mansion Tax-like change to Stamp Duty Land Tax (SDLT), adding bands and raising rates from 4% to 7% on the full value of new home sales above £2m.
In an attempt to split the coalition in 2013, Labour then joined the debate, proposing to commit to their own version of the Liberal Democrat proposal. This led the then Conservative Home editor (and future Number 10 advisor) Tim Montgomerie to comment approvingly on Labour’s grasp of the politics with a Times piece All Good Tories Should Support a Mansion Tax. His argument in essence being that since housing, particularly at the higher end, was a ‘rigged market’, it was not a defence of the free market to oppose the tax. He predicted the policy might help Labour win the 2015 General Election. This proved inaccurate.
With differences in emphasis, several IEA authors dissented from this view at the time. Prof Philip Booth commented that the mansion tax “falls right at the bottom of the “best buy” list when it comes to wealth taxes”. “Unjust, badly designed and arbitrary”, he noted that the best way to address a ‘rigged market’ was to simply address whatever is responsible for the rigging, which, in this case, would have meant loosening the planning restrictions preventing supply from matching demand. Other IEA authors noted that a better way of capturing the unearned rewards from ownership of a fixed-supply resource like land would be a Land Value Tax, not a property value tax.
In 2014 the Conservatives responded to the debate by changing the SDLT system again, this time making it more similar to the income tax system, with different rates applied to values that fell between different thresholds (rather than a single rate applied to the full value). The highest rate was 12%, applied to house price values in excess of £1.5m. This is the system that survives today. Meanwhile the Liberal Democrats moved away from the Cable proposal to one favouring allowing councils to add new Council Tax bands for higher value properties. Something the SNP administration also considered in Scotland, but did not adopt, preferring instead to replace SDLT with a Land and Buildings Transaction Tax (LBTT), which is similar but more progressive. Their 12% rate started at £1m, it is now at £750,000. A notable evidence point for those who do not believe once introduced a mansion tax would only remain a tax on mansions.
Brexit stalled further debate on the topic from 2016, but the Government may now bring it back in some form, although we do not know what.
There are many arguments against the Mansion Tax, but the central critique is that the value of assets is not visible until they are bought and sold. Without real transactions to assess prices, any annual tax bill will be estimated. This situation already exists in the case of Business Rates, based on implied rents. A system that creates tens of thousands of appeals, and is both extremely inefficient and politically toxic as a result. (To be fair, this would also be an issue under the Land Value Tax system favoured by some of colleagues – one reason why IEA authors differ in their approach to property taxation.) Sales are facts, assumed values are not, and few who can afford a £2m+ home are going to passively agree with a civil servant’s sense of entitlement to their earnings. Particularly at the upper end, where the tax rise could be tens of thousands, every year.
Well-off homeowners are also early adopters in many of the green technologies the Government desires as a matter of policy. The Mansion Tax is a tax on home improvements, notably gas boiler replacements, solar panels, better insulation, ground source heat pumps and charging points for electric vehicles. One of the reasons Council Tax only has eight bands is to minimise such disincentives, other than at the boundaries. Businesses conversely have to list every item of plant and machinery investment in a spreadsheet for business rates, and this increases their tax bills as a result. The disincentives will be real and immediate. (This is a problem which replacing Council Tax and Business Rates with a pure Land Value Tax would avoid. LVT would not be affected by home improvements or business investment.)
Like the Window Tax – the original bad property tax – the Mansion Tax will distort other behaviours. In the 1700s property owners bricked up windows resulting in poor light and ventilation that contributed to spreading diseases like typhus. In the 2020s, homes will be subdivided, allowed to dilapidate, and split between partners in fake separations. It would be ironic if a socially conservative proposal to ape a failed political strategy ended up increasing family breakups, even if only for tax purposes.
The tax will also be deeply unfair. As a specific rather than general wealth tax it can take no account of debt. Someone with a £1m home and no mortgage has more wealth than someone with a £2.5m home and £2m of borrowing. Beyond the politics of envy and expediency, it is unclear why ownership of this specific asset within that specific asset class is a social harm as a result of ‘a rigged market’ requiring a special tax, while the other is not. A mansion tax can take little account of earnings or ability to pay. The Liberal Democrats were obliged to consider measures to allow posthumous payment to avoid the policy evicting asset-rich but cash-poor pensioners. It taxes people for the good luck of picking an area when young that became popular later. It is for these reasons and others that the Liberal Democrats ditched it.
The Council Tax bands proposal conversely is less controversial. The current system with bands from A-H based on 1991 valuations treats McMansions and modest detached houses as one in the same, it is not unreasonable to believe adding bands at the top end could reduce that distortion.
New bands are not a decision that needs to be taken by national Government and applied nationally. The appeal for the Scottish scheme, for example, came from Edinburgh Council. If councils were allowed to choose whether or not to impose additional bands these bands would at least reflect local political priorities and restraint via tax competition. Surrey for example might choose to focus on paying for personal care and new roads, London on early years learning, Trafford on neither, in the hope of attracting Southern oligarchs and business investment. This kind of decentralisation is also in the Government’s stated objectives for political reform.
Other schemes, for example a comprehensive replacement of stamp duty with a low rate of capital gains on first homes (it already applies at full rate to second homes) are possible. They could be less distortionary, and speak to a need to consult on local property taxes comprehensively, fully considering the trade-offs of different options, rather than rushing out schemes for the Budget that could last decades, to send a message today.
In summary, any bespoke ‘Mansion Tax’ is principally a political gesture. There is no need to make our already complex system of inconsistent local property taxes more so. Additional Council Tax bands, locally applied, make the most sense in respect of other government priorities, but will not address the issues arising from the reluctance of any government to revalue the properties. Other schemes might be better than either and speak to the need to move cautiously based on a more comprehensive review of what local taxation is trying to achieve.
 Although by the time he proposed the policy in 2009 housing values had fallen to on average £165k, which should have cautioned him on the unwisdom of using asset prices as a justification for a tax rise or their predicted revenue.
 £260 to £425 in average pay per week, according to the ONS.
 The current structure was arguably justified at the time, because of the government’s desire, inherited from the predecessor Community Charge (poll tax), to cap contributions to local spending on the basis of consumption of local services. This consumption is limited. It is not proportionate to the size of your home.