Labour’s mansion tax ‘will be a disaster’
Does a fresh lick of paint in the kitchen increase the value of the house? Or a heated towel rail in the bathroom? Or an attractive water feature at the back of the garden?
We learned this week that the government is planning to appoint teams of inspectors to visit people’s homes, and decide whether the owner has to pay the new “mansion tax”.
An extra levy will be imposed on homes worth more than £2 million, on a sliding scale going up to beyond £5 million.
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It is meant to come into force in April 2028, but it is already proving a lot trickier than ministers seem to have realised.
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Earlier this year, HMRC said it was hiring hundreds of inspectors to help with the valuation of everyone’s home.
They will all have powers to enter a property to assess what it might be worth.
We can see what the authorities are getting at. If you simply rely on previous sale prices, it takes no account of how a house might have been improved, and lots of homes may well slip through the net.
There is a catch, however. It illustrates that while a mansion tax might appeal to the class warriors on the Labour backbenches, it is going to be very difficult to implement in practice.
There are three big problems. Firstly, going through a large house and trying to figure out how much each “improvement” or “feature” has added to its value is a huge task, and one that will take several years, at a minimum, of training before the “value police” are ready to start work.
It is a huge undertaking, from a state machine that can’t build a new railway, or reservoir, or any extra houses. It is hard to believe it is all actually going to happen, and even if it does there will be years of delays as there is with every other government project.
A mansion tax could create a legal quagmire
Next, many of the valuations, quite rightly, will be taken to court.
The Office for Budget Responsibility (OBR) gave us a glimpse into the legal train wreck heading towards us earlier this year with a forecast that 20% of valuations would be challenged in court and that 40% of the legal cases would be successful.
The courts are going to be clogged up for years deciding how much individual homes are worth, creating huge backlogs and crowding out time that should be spent on far more serious issues.
Even worse, the top end of the British housing market is now in freefall, in part because of the looming mansion tax.
In Westminster, prices are down by 25%; in Kensington and Chelsea, 15%. Those falls are starting to ripple out into other boroughs and into the leafy commuter suburbs as well.
With those kinds of price declines, homes are going to drop below the £2 million threshold in huge numbers. The inspectors will have to change valuations constantly, and some owners are going to be heading back to court every year to try and get the tax removed.
Finally, the tax will only raise tiny sums anyway. The OBR has already downgraded its forecasts for the amount of revenue it will raise from £400 million in its first year, rising to £435 million by 2030-2031.
But it also warned that revenue would fall by £370 million before April 2028 because of reduced stamp duty, capital gains tax and inheritance tax receipts as households sold or downsized.
In other words, once all the costs are taken into account, the mansion tax may not end up raising any money at all.
All those expensive inspectors, with generous holiday allowances and gold-plated public-sector pensions that will stay on the government’s books forever, will have been employed for absolutely nothing.
Those are just the practical details. The government still needs to deal with the moral issues.
What will it do about elderly homeowners, for example, who might not be able to sell a big house, but also can’t afford to pay the extra tax on it?
Will it be able to face down the inevitable political backlash?
And given that the top 10% of earners already pay 60% of all the income tax collected in Britain, how can it justify yet more taxes on people who are already paying for most of what the state does?
And if the tax does cost more to implement than it raises in revenues, as it almost certainly will, how can it justify the drain on public finances at a time when the deficit is already soaring out of control?
The tax has not come into force yet. But it is already turning into a disaster.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
