A Mansion Tax

by George Hatjoullis

In my blog Personal Finance 8: residential property (Property Tag), I explored the rent or buy decision. I clarified that renting and buying-to-let was a leveraged and undiversified investment and that residential ownership was simply buy-to-let-to-yourself. The latter has certain advantages over buying-to-let and then renting somewhere to live. In particular, one pays no income tax on the implicit rent one pays to oneself and main residences do not incur CGT. Home ownership is a tax efficient way of purchasing residential services and making a leveraged investment in property.

The so-called Mansion Tax being mooted by the Labour party and the Liberal Democrat Party proposes a levy on the value of residential property. One justification is that the easy money policy has boosted house prices disproportionately and exacerbated wealth inequality. Another way of looking at this is that the implicit rent for living in an owner-occupation has gone up and the owner-occupier is paying this to herself tax-free. Also sales of owner-occupied properties do not incur CGT. In a sense, people in high value properties are able to live in a high rent areas because of an implicit tax subsidy on the rent that they pay to themselves and no tax charge, apart from Stamp Duty, for moving. The Mansion Tax is deemed a legitimate way to claw back this implicit tax subsidy.

Strictly speaking it would make more sense to impute a rent and include the implicit rental income in tax calculations. However, this is cumbersome. The proposal is to set a regular tax on owner-occupiers based on a somehow determined property value. This is separate from a council tax which accrues to the local authority. The Mansion Tax accrues to the exchequer and is unambiguously a wealth tax and designed to address wealth inequality. As rent and property value are correlated it is a relatively simple method for levying such a wealth tax.

Of course, it is a rather arbitrary. A £2 million pound threshold is mooted. It may mean that some people who are living in such homes are unable to pay the tax and will need to move. People that live in high value (high rent) properties will need to have a commensurate after-tax income. One consequence will be that rich ghettos will become even more exclusive and anyone that retires on an inadequate pension will need to move. Quite right too. Why should an old widow that has lived in a home all her life and brought up her family there and formed a bond with her local community continue to live in a house that has too many memories and rooms for her to use and is worth a large fortune. Off to a home with her. It is obviously her fault for living in an area that has become desirable.

Income redistribution is necessary at the moment because inequality has become too wide and threatens the very stability of the market economy. However, there will be casualties if it is not achieved with care and it will be emotive casualties that handicap the process. The reality is that many high value homes are under-occupied by people who regard the house as a home. It creates a real dilemma and real suffering to impose a Mansion Tax on such people. However, wealth taxes to reduce inequality are necessary and property is a logical target. A tricky policy issue.