Savills Vietnam - NEW | Location, taxation, location

A political hot potato, we assess the potential impact of a mansion tax on the prime housing markets of the UK.

The taxation of high value property has been one of the key topics of discussion within the prime housing markets over the past two years, despite the fact it has been ruled out under a Conservative government.

While it is difficult to be sure whether it is just political posturing, the recent announcement that Labour now favours a mansion tax warrants a more detailed look at the impact which it would have on the prime housing markets of London and the South East.

Recent tax changes

Our experience from recent increases in stamp duty and the imposition of charges on £2 million+ property held by ‘non natural persons’ has been that price growth has been tempered. However these measures have not caused the market to be flooded with property from those wishing to leave the country.

Unlike the stamp duty which is a one-off payment at the point of a transaction, a mansion tax would be an annual tax. Additionally the potential blanket application across all £2 million+ homes, distinguishes it from the measures recently introduced by the coalition, which are targeted directly at those who have actively sought to avoid tax.

It is therefore difficult to see that the impact of a mansion tax on the market would be as benign as recent tax changes. But equally we do not think it would undermine the market. To do so it would need create a tax environment so unwelcoming that it would outweigh the wider attractions of prime London property and drive wealth from the UK.

The precise impact would depend on the basis upon which the tax is charged and the expectation among buyers as to how long it might apply.

Basis of charge

Labour has not yet announced the form a mansion tax would take, if they were to be elected and then introduce it.

By contrast we know that the Liberal Democrat proposals are for a charge of 1% on the value of a property to the extent that it exceeds £2 million. Accordingly the annual charge for a property worth £2.1 million would be £1,000, that for a £5 million property would be £30,000 and that for a £10 million property would be £80,000.

If this proposal were to be adopted it would mean that the tax charge would be tapered, as theoretically would any impact on value.

By contrast, a flat rate tax on the total value of the property would create more entrenched price thresholds in the market and much greater potential for a trickle down effect into lower value markets.

Number of drawbacks

We believe that a mansion tax has a number of drawbacks that are likely to limit its effectiveness:

• It would raise relatively little revenue, perhaps £1.6 billion, if it were adopted in the form suggested by the Liberal Democrats

• It would have no regard to the disproportionate tax burden already borne by high value properties, most notably in London and the South East, given the nature of both stamp duty and inheritance tax

• It would be costly to administer given the contentious nature of valuations and the consequential potential for dispute

• It would punish the capital rich, income poor and owners of large listed buildings with a high cost of upkeep

• It would be poorly targeted at properties which the general public might consider excessive because of regional and local price differentials

• It would not discriminate between those who are perceived to make an insufficient contribution to taxes in the UK, as opposed to those liable to the full spectrum of domestic taxation.

Potential market impact

Accordingly there is a reasonable chance that it would prove to be ineffective, or worse, counterproductive.

Much like the development land taxes of the 1970s, there would be a strong prospect of it being repealed by a Conservative government, even if it were introduced on a change in administration.

Though we would expect buyers would have to regard to higher overall costs of ownership, these factors are likely to limit the underlying impact on value and volume of demand.

Other market impacts are just as likely. For example, we would expect a greater tendency among retired owners to downsize and more families to buy outside of London and keep a smaller second property in the capital.

To date, with discussions regarding a mansion tax sporadically making the headlines, there has been little if any evidence of buyers changing their behaviour. Whether and how this changes is entirely dependent on the politicians and the stance they take as a general election draws closer.

We would expect the problems with mansion tax to cause political parties to look at other more equitable options, less damaging to the perception of prime UK property. For example, a restructuring of council tax would be less contentious and, subject to the nature of any changes, might have less of an effect on a market already generating significant tax receipts.