So how will people owning property which is exposed to a prospective mansion tax react if the proposal becomes law ?
Even though there is little flesh on the bones of a prospective mansion tax as yet, one can easily anticipate some of the effects in the real world as home owners grapple with its implications. Estimates of the number of properties with values exceeding £2 million vary from between 60,000 – 120,000. However, of these it is thought that around 40% or more will fall within the £2 – £2.5 million range. It is therefore safe to assume that most of those 40% will dispute any ‘adverse’ valuation in the first instance …. and that will mean many costly and time consuming tribunal hearings. This is likely to be a long and frustrating process for all concerned.
Where home owners are ultimately unable to agree a valuation which places their property below the vital threshold, their next step will be to consider whether to sell or not.
There are two categories of people who may seriously consider this course of action.
Firstly, the policy could easily affect pensioners hardest because it is estimated that almost a third of properties worth more than £2 million have been in the same ownership for more than 10 years. Those who will struggle to pay the assessed tax because their savings or income are insufficient may have to sell up or look for contributions from the wider family. It has been suggested that the liabilities of cash-poor but asset-rich pensioners could be rolled up into their ultimate inheritance tax liability on death but this will still sound like a stealth increase to inheritance tax to many and this may easily colour the views of those affected and therefore their willingness to take action.
Secondly, there are those who will simply not wish to pay on principle ( see my earlier post on this ).
For those just below the vital threshold, a mansion tax will become a major disincentive to certain activity which is generally perceived in a positive light – leaseholders acquiring their freehold, for instance, or those upgrading their property through home improvements and extensions.
On the other hand, those just above the threshold may consider dividing properties into smaller units, perhaps granny flats, in attempts to reduce the value of their homes for the purposes of mansion tax. They may also consider altering their legal interest in a property using well established techniques developed in the sphere of inheritance tax planning.
Any non-transactional tax is bound to have unintended consequences. Window tax, for example, was introduced in 1696 and was relatively easy to assess since windows are clearly visible from the street. While the tax appeared to be superficially equitable in that the more windows one had the more tax was paid, it affected certain groups disproportionately … and not necessarily those with large numbers of windows. By the early 18th century it was clear that there was a pronounced decline in revenue raised by the tax as a result of windows being blocked up and new houses being constructed with fewer windows. By the mid-19th century glass production was astonishingly at the same level as at the height of the Napoleonic wars despite the large subsequent increase population and extensive house building activity. The tax had affected peoples decisions and behaviour as well as having economic implications. It was ultimately abolished on health grounds.
There are no direct parallels here but, as I highlighted in the first part of this blog in September, most UK governments are keen to promote activity in the property markets. Against this background, activity may slow and therefore directly impact on the much more important transactional taxes. This unwelcome side effect together with the anticipated paltry benefits to the exchequer have led successive governments to historically concentrate on extending existing taxes rather than inventing new ones.