Money is tight in Whitehall. Both Labour and the Conservatives are promising to cut the deficit to varying degrees if they win the General Election
And Westminster is surrounded by some of the most valuable real estate in the world.
House prices in London have boomed since 2013, so an obvious solution presents itself – confiscate some of that wealth.
But how best to do it?
George Osborne hiked stamp duty on expensive homes in his Autumn Statement, while reducing the levy on the cheaper 98 per cent of sales. Under those new rules, a house selling for £275,000 saw its stamp duty bill cut by £4,500 to £3,750, while a property worth £2m saw its bill rise £53,750 to £153,750. Overall, the stamp duty changes represent an annual tax cut of around £800m.
Tax homes worth over £2m
Labour wants to add an annual levy to the most valuable homes, its mansion tax, rather than changing the transaction tax.
There is certainly room to quibble about the definition of a mansion.
Dictionaries tend to stick with “a large, impressive house”, while Ed Miliband has set it at homes worth more than £2m.
It will result in awkward comparisons. Pokey, one-bedroom flats in Kensington routinely sell for more than £2m, while a sprawling seven-bed pile in an upmarket corner of Northumberland will fit comfortably below the threshold.
But it targets the asset-rich, and those in London in particular.
One clear problem is how to value those houses. The last nation-wide valuation of homes took place in 1991 when council tax bands were set, and no government has dared touch them since.
Labour is set to ask owners to submit their own valuations, a process which will be tricky to evaluate or police. Properties in a corporate envelope are taxed based on self-valuations currently, and the party wants to extend the system. But it might be harder to work out the value of a house which has not been sold for 30 years than it is to put a number on a corporate asset.
Labour estimates the tax will apply to below 0.5 per cent of all homes, amounting to around 100,000 properties. Surveyors’ and estate agents’ figures range from E.surv’s estimate of 60,000 homes to Knight Frank’s 110,000.
How much will it bring in?
The next problem is working out exactly how much the tax will raise. Labour wants to bring in £1.2bn from the tax. The party plans to charge those with homes worth £2m to £3m an extra £250 per month, or £3,000 per year.
If all the homes were charged £3,000, it would raise £300m – one-quarter of the target.
That raises questions as to how much the homes worth above £3m would pay. Labour has not given a firm answer yet, but does say it would be proportionate, so those owners can expect a very large tax charge each year to cover the remaining £900m target.
The future of most taxes is certain – they tend to hit more and more people over time. For instance, rising house prices mean the government expects stamp duty revenues to rise from £9.4bn in 2013-14 to £18bn in 2019-20.
By contrast, Labour has said it plans to keep the proportion paying the mansion tax steady, by changing the threshold in line with the average price of the homes affected when the charge comes into force.
And one glimmer of hope for those who have an expensive house, but not much income, is that Labour will allow them to defer the tax payments until the property is sold, effectively adding it to their newly increased stamp duty bill.
Do other options exist?
The Lib Dems also want a mansion tax, targeting the same number of homes and a similar amount of revenue, achieved by adding new council tax bands.
A similar alternative has been put forward by the Institute for Fiscal Studies (IFS), but one which would avoid any new valuation troubles.
By doubling the charges on those in the top bands, G and H, the government – or local councils – could bring in £2bn per year, from the top 4.2 per cent of households.
“Introducing a separate ‘mansion tax’ would be unnecessarily complicated when council tax could be brought up to date and refocused on higher-value properties,” the IFS said in a paper written by Stuart Adam and Barra Roantree.
“Increasing council tax on high-value properties would certainly hit wealthy households hardest. It would also be progressive across the income distribution, though the losers would also include some who lived in big houses but with low current income and who, for one reason or another, were not protected by means-tested council tax support.”
If Ed Miliband is worried that his mansion tax will come up short, this could be a quick and relatively easy way to raise more cash across more of the country – though it would be a touch harder to dismiss the victims as mansion-owners.
100,000 - Labour wants to target somewhere below 0.5 per cent of Britain’s 26.4m homes with the tax, and expects it to hit 100,000 properties.
£1.2bn - Ed Miliband hopes to raise £1.2bn per year from the tax, with most of that revenue coming from homes worth more than £3m
Miliband’s mansion - Ed Miliband would be the only party leader to pay his mansion tax, thanks to his London property benefitting from the price boom