Progress | Centre-left Labour politics

How should we tax property?

A ‘mansion tax’ will not solve the problem of how to tax wealth, but there may be another solution, writes Michael Edenborough 

It has been suggested that a mansion tax might be introduced for high value properties based upon a comprehensive revaluation of the entire housing stock. There are at least four manifestly adverse consequences.

First, it would be difficult to implement, because of the logistical difficulties in revaluing all the properties under consideration within the short period of time that would available before the tax would be applied.

Secondly, it would adversely affect those on limited income who reside in high value property. A disproportionately large number of those would be elderly people who still live in what have been their family homes for many years. It would be morally repugnant to force such people to relocate against their wishes.

Thirdly, the very name suffers from the problem that while it appears to apply only to ‘mansions’, in reality it would apply to every house in a standard terrace in many parts of the wealthy cities around the country. Such houses are occupied by very middle class (but not necessarily rich) people who are exactly the electorate whose support is needed in order for Labour to be voted into government.

Finally, if it were introduced only for property above a certain threshold, then it would cause a dislocation in the property market, with the concomitant potential problems for the economy as a whole.





A potential solution to these problems would be to introduce a tax that was a flat rate levied upon the last sale price of the property. As such, those elderly people who had purchased their house many years before would pay a tax based upon that historical sale price; even though they might now be on limited income, the property tax would be correspondingly lower because of its lower historical base figure. Therefore, it would be likely that they could remain at their properties until they wished to sell. At which point, the value of the property would be determined anew when sold to a purchaser who would be aware that the tax now payable would be based upon that new figure. There would be no need for a separate revaluation exercise, because the tax would be levied on the sale price, which is already recorded for purpose of Stamp duty. The rate of tax could be changed without undue difficulty by a simple legislative instrument, and could be adjusted either locally or nationally or a combination.

While the rate would vary widely across the country, the sums raised for each area would be more comparable, and also determined to some extent by the local electorate, as they would determine what services they wish to have locally. Within a few years, nearly all of the eligible properties would be taxed at near current market values, as it is common for people to move house every few years or so. Even though the tax applicable to any particular property would only change on each sale of that particular property, collectively there would be a gradual increase across the whole stock. This gradual change ought to avoid any shock to the general economy that might have been caused by the introduction of any new tax on the assessed current value for every property. Further, it is likely that such an approach would impose a gentle dampening on house prices, as the more expensive properties would be more expensive to maintain, and so the higher running costs would lead to a decreased purchase price, which would go some way to rebalancing the housing market.

Indeed, the advantages to a property levy on the sale price are ample: such a levy would be quick and easy to implement as only a simple Act would be required. It would be easy to understand, as the levy would be a fixed percentage of the price last paid for the house. If levied universally on the whole sale price of any residential property, then there would be no justification for calling it a mansion tax, as it would apply equally to a studio as it did to a palace. It would be cheap to administer as the sale price is a known figure that is already recorded for the purpose of Stamp duty, and as such there would be no need for any further administrative costs associated with the revaluation of the entire housing stock in the county.

It would be difficult to avoid, as anti-avoidance provisions are already in place to deal with the payment of Stamp duty and the transfer of real property. There would be few disputes, as the sale price is not open to doubt, and so there would be little wastage in the collection of the tax. The levy ought to be the same rate for all residential properties in a given locality as that would ensure that there are no dislocations in the market due to banding, which often has the unwelcome consequence of leading to aberrant marginal rates of tax. It is clearly fair, as more expensive properties would pay pro rata more than cheaper properties. It would remove the current anomaly that very expensive properties are paying the same, or only slightly more, council tax than is paid on properties that are valued at only a small fraction of the more expensive properties.

Its individual nature would reflect the fact that property values vary street-by-street (and sometimes, within a street), and so it would reflect the specific level of desirability of any particular property. It would catch the very rich with very expensive properties, and those who maintain unoccupied houses. Unpaid levies could be placed as a charge against the property and so be redeemable upon sale, which could be forced if need be by the state. It would automatically re-set itself on each transfer (and as most properties are sold every 5-7 years or so, that means that it would adjust more regularly that the current system). It would protect those few that bought property a long time ago, as they would pay a levy based upon the price for which they bought the property, but which would be re-set upon sale (or transfer by inheritance) to new owners. It might dampen the top end of the market, as the running costs would become significant for very expensive properties newly purchased. Any improvements in the property would be reflected by the increased price obtained upon the next sale, without the need for any revaluation by the state. The new levy would only take effect upon the sale of the property, and so this would not dissuade the current owners from making improvements. Rented properties could be levied as a percentage of the rent (which would reflect the current market value), and this would most likely change more often than the sale price and so an investor would not get any windfall.

Rather than reheating the idea of a mansion tax, we need new alternatives to property taxation – and the idea of a flat rate levy should be seriously considered. The evidence is overwhelming.

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Michael Edenborough is a QC and Progress member

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Photo: by Albert Bridge, licensed under Creative Commons

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Michael Edenborough

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