The London Tax

by George Hatjoullis

The election looms and any government that is not Tory (or UKip) is likely to introduce a London Tax, also known as a Mansion Tax. It should be known as a tax on arbitrarily calculated London house prices. The initial threshold is set at £2 million which is why it is effectively a London tax, as circa 90% of such houses are located in London. Many see it as a good idea because it taxes the rich, not a popular group at any time, and being numerically small and concentrated, does not have much electoral downside (except perhaps when it comes to funding political parties of course).

All taxes hurt someone so there is no painless way to raise revenue. This one is popular because people believe it hurts a numerically small number, concentrated in London and generally regarded as well off. Think again. Threshold’s change and today it is £2 million but tomorrow who knows? The valuation process is also somewhat opaque at the moment. Most important, the ONS inform us that average house price growth since 1980 has been 6.9% and house prices have only fallen in 7 of these years. The past is no guide to the future but let us project using this rate of growth. If your house is worth £1 million today it will be worth £2 million in 10.5 years. Of course, future governments may index the threshold but they may also not do so, and may even lower it. Once the tax is in place politicians will use it as they think expedient. This much is 100% certain. There are many people living in London in modest houses that cost circa £1 million. Many of these households look to ‘trade up’ to bigger properties, so the move into mansion tax category will be accelerated. Ignoring the proposals because it does ‘not affect me’ is short-sighted. The question to be considered is whether it is a ‘good tax’.

Economists like the notion of a neutral tax. This simply means a tax that does not change economic behaviour. Of course, sometimes economists want to change economic behaviour so a good tax can be one that achieves the desired change. A tax must ultimately raise revenue so other criteria are also relevant. It must raise more revenue that it costs to collect. The more it raises relative to cost of collection, the more efficient it is deemed to be. It must also not cause other revenue sources to decline as a result of the imposition of the new tax. This would also be a ‘cost’. Finally, it must be deemed to be fair, otherwise the political reaction can be severe (see Poll Tax Riots). Let us explore these considerations.

In aggregate terms it is likely to be neutral in that people will not stop living in London. However, the composition of London may change. Not all people living in £2 million + houses have strong income and cash flow. The cost of living in London will de facto be increased and this will probably skew the population composition to those with high incomes. It will become even more of a rich ghetto, at the margin. Is this the policy change that is desired? Will this help those currently on modest incomes and doing socially essential work in London acquire a decent place to live? This would only be the case if the revenue so raised is hypothecated for this purpose. This is not the plan of Labour or the Lib-Dems. The tax just goes into the pot, though I have heard talk of funding the NHS. We shall see.

One of the options mooted is that those not able to pay defer the accumulated tax liability until the property is sold. There is already a ‘sales tax’ and, though it is strictly speaking levied on the buyer (stamp duty), the incidence falls on both parties through the price. The Tory/Lib-Dem coalition has recently reformed this tax and made it progressive. Higher value properties now incur a progressively higher tax. Why is another tax required? Indeed, given that deferral of the mansion tax is deemed an option why not simply bring a threshold into the capital gains tax status of main properties. Under the current arrangements the main property is exempt from CGT. One could make gains over and above a specific threshold liable for CGT. The threshold could be set to be equivalent to deferral. This is a more efficient tax because it uses an existing mechanism and does not require any valuations. The sale proceeds are what they are! The tax is raised when the property is sold as with deferral.  Another ‘justification’ for the mansion tax has been reference to council tax bands. The simple solution is to add more bands. Of course, then the revenue will stay in London and may be used to subsidise social housing in London. That would not do would it.

There is a problem with housing in London. The population is growing fast and there is insufficient social housing. Some parts of London have become a safe deposit box for wealthy foreign investors and this has deprived residents of potential, albeit expensive, housing. The mansion tax, as presently envisaged, does not address any of these problems. Indeed, it may be that only rich foreigners can afford London property after the tax is established. The mansion tax, or more properly, London tax, is a tax born of resentment and political expediency and victimizes people who have done nothing more than live in an area of London that has become desirable.They may well have lived there for generations.