With the cranes above the London skyline appearing ever more plentiful and the implications of party conference speeches still being debated, the assertion that regulators or politicians will be the ones to bring the London property boom to an end has never seemed so predictable.
Stricter lending criteria, taxation and the regulation of bankers’ bonuses have already started to stunt growth in the capital’s residential market. As Savills pointed out last month, prime London properties under 1,000 sq ft have risen in value by 22% since mid-2012, while those over 7,000 sq ft, where the tax burden is most significant, have seen price rises of just 3.3%.
The looming general election and talk of new taxation on homes over £2m are a further discouragement to some buyers at the top end of the market. Certainly, a mansion tax is a popular policy with much of the electorate — and therefore a strong political tool — but underneath the hype, few can deny it is simply not the right way to go about tackling the deficit.
Interestingly, while the policy has become one of Labour’s flagship proposals, it has been far from championed by the London mayoral candidates. This should come as little surprise: a mansion tax is also mainly a London tax. Knight Frank estimates that more than 70% of the UK’s properties valued over £2m are located in the capital and the faster growth of London property values compared to the rest of the UK is likely to push this percentage ever higher. Already, £2m hardly buys a mansion in much of London; centrally located apartments and relatively modest family homes that have risen in value over a generation also fall into this bracket.
Indeed, the number of properties that would be subject to a mansion tax is estimated to have doubled since the idea was first put forward by the Liberal Democrats in 2009. This highlights the difficulty of implementing such a tax in practice: more and more properties would be affected as prices increased and the fact the property market is constantly changing, with prices rising or falling at different rates in different areas, would make the valuation process an enormous, ongoing and very costly operation. The time, cost and complexity of putting such a tax in place has generally been glossed over, although the politicians themselves have acknowledged the process would take at least two years. A self-valuation process would be equally difficult, inducing people to undervalue their properties.
The sentiment behind mansion tax is understandable. At a time when the deficit needs to be reduced, taxation has to come from somewhere and it is right that those who can afford to should be the ones to pay. However, the difficulty of the valuation process, as well as the likely impact a penal charge would have on revenues from stamp duty, inheritance tax and capital gains tax, mean the idea of a mansion tax in the forms currently being explored are fundamentally flawed.
Instead, local authority taxation, which would take into account the disparity that exists within the UK’s property markets, is a much more practical way forward.
A survey from Knight Frank late last year showed the annual cost of owning a $3m new-build residential property was lower in London than in 10 other international destinations (New York, Bahamas, Miami, Barbados, Moscow, Geneva, Sydney, Paris, Dubai and Singapore). And, as Savills points out, the owners of the highest value properties in Westminster pay just £14 a year more in council tax than those living in a two-bedroom second-floor flat in Weymouth. Clearly there is some headroom here.
The existing council tax banding system is based on valuations from more than 20 years ago. Since then, UK house prices have risen by almost 240% and prices in prime central London have risen by more than 610%. The current council tax banding system is not set up to deal with very high value properties. The rates are also disproportionately lower in the most expensive boroughs of London than across the rest of the country.
New bands at the top of the market would lead to a fairer system while avoiding the logistical issues associated with the introduction of a new tax. The Treasury could access the funds from the new council tax bands directly, relying on local authorities to collect the funds on its behalf. The bands would serve the same purpose as the proposed mansion tax while preventing the obvious consequences of aggressive taxation.
Nevertheless, in spite of the fundamental stumbling blocks related to mansion tax, its presence on the political agenda looks set to continue: after all, taxing mansions is a rather more emotive and attractive proposition for the majority of the electorate than introducing reforms to the council tax system.
Jonathan Goldstein is head of European investments at private investment company Cain Hoy
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