A number of recent articles have been focussed on a prospective mansion tax. This is for good reason in that this would be one of the most significant changes to the taxation of high value residential property since the introduction of the Annual Tax on Enveloped Dwellings (or ATED) and more wide reaching in that the tax would be based on value rather than only being payable if a property was held by a company or other non-natural person.
Initial proposals revolved around an annual payment based upon a set percentage (1 per cent was widely discussed) of the excess value above a specified minimum level.
With Ed Balls’ recent comments, the different possible approaches to this issue have been further clarified.
Labour appear now to favour a banded annual payment for high value residential property similar to ATED. Ed Balls stated that this would be simpler to implement than a percentage levy and he also specifically referred to the current ATED regime in his comments giving a sense of what a new landscape may look like.
This proposal would presumably result in a less eye watering potential tax liability at the top end of the market than a blanket percentage levy. However, there is a suggestion that those at the top will make a ‘significantly bigger’ contribution than those in lower value properties but what that means in exact cash terms is as yet unclear.
There is always the uncomfortable possibility that the legislation may allow for arbitrary, uncertain and possibly large annual increases in any charge (increases in the ATED bands on the other hand are linked to increases in the consumer prices index).
There is however some indication as to the level of the charge. This is because reintroduction of the 10p tax rate was referred to as being funded by this levy – someone with a more mathematical brain than I could presumably calculate the rough level at which bands may need to be set based upon this. There would always be the possibility of disproportionate payments being levied on the most valuable properties as set out above.
The shadow Chancellor also appears to have listened to a number of objections previously raised, the lower value limit at which the tax would be charged would be raised annually in line with average house prices and there would be deferral on payment for the asset rich but cash poor (though how Ed Balls’ calls for an ‘administratively simple’ tax marry up with possible means testing of those pleading poverty remains to be seen).
To recap on the current other proposal being trailed in the press, the Liberal Democrats have announced proposals to reform council tax to introduce new higher bands for valuable residential property.
Whether a mansion tax comes to pass and what it will look like seemingly depends very much on the complexion of the next government. However, any government should consider very carefully whether yet more taxation of high value residential property coming hot on the heels of the extension of capital gains tax to non-residents may further deter the many overseas investors and wealthy individuals who help make London such a dynamic global city from coming and staying here and drive wealth creators to more fiscally attractive jurisdictions.
Worryingly, we may not know what the effect of such a tax upon these peoples’ homes will be until after they have sold up and left.
Edward Burton specialises in real estate and is an associate at boutique private client law firm Maurice Turnor Gardner LLP