Property tax, is the “Mansion Tax” a good design?

Many commentators argue that a greater focus on property taxes would be a good direction for tax policy to take. Property tax tends to be easier to collect and more difficult to avoid, the debate is about value not the liability to tax and values will fall within a range.

A number of political parties in the UK are proposing a “Mansion Tax” to be charged on properties with values exceeding £2m on an annual basis in addition to current property taxes. Is this good tax policy?

The first point to make is that this is not a tax on “mansions”, a majority of the properties which would be subject to the tax look like the featured image , they are terraced properties in London. Very few country mansions will be subject to the tax. Most of the tax falls on terrace properties and apartments in London because this is a land tax, what is being taxed is the value of the land not the property which sits on it.

The second point to make is that the tax has all the issues associated with cliff edge bands. It appears to start at £2m and go up in £1m tranches. This means that there is a big gap between the tax paid on a £1,999,000 property and a £2,000,001 property with the second liable to a tax of £3000 per annum. This poses an interesting question for properties close to each band change in value, does the impact of the mansion tax decrease the value below the band level or indeed make the property not subject to tax? If we take the £2m threshold as an example and the liability of £3000 per annum, This gives rise to a negative impact on value in net present value  terms whose amount depends on the discount rate one uses and the period of time. If we use a 5% discount rate the negative value of the mansion tax is £13k over 5 years, £23k over 10 years and £37k over 20 years or a 2% hit to the value of the property. I assume that owners will argue this case when values are calculated, so the actual threshold becomes £2.04m in the 20 year example if a 5% discount rate is used. This issue is aggravated further at higher prices and higher liabilities to the tax as the rate increases with each band.

The third point to make relates to the devolution of tax raising powers to the “countries” of the UK and now suggestions that it should include large Cities/Conurbations. If one of the taxes to be devolved is property tax (and Scotland has already started to raise its own property taxes on a different basis to the rest of the UK) then surely the Mansion tax proceeds should be ring fenced to the taxing area in which they arise? The Mayor of London has proposed this and it appears to be the logical outcome of a devolutionary approach to property tax (and remember this is a property tax in the sense that it is a tax on land).

One might wonder why this proposal has come about, the UK already has a system of property taxation -the council tax – but this is based on historic values and hasn’t been updated for over 20 years. A more practical approach would be to update the values for the purpose of council tax and introduce some higher bands, but of course that would be politically difficult and the proceeds would go to the local authority in which the property is located.

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