Following proposals put together by the Liberal Democrats but rejected by the Conservatives, Ed Miliband has now proposed a Mansion Tax to be levied on homes with a value of £2 million or more.

Taxes such as this, which are not transaction based but based upon opinion, are more difficult to assess and administer than those based on an ascertainable and definite figure of, for instance, income or profit. Property valuation is notoriously difficult to pin down with any precision yet this is exactly what is required to be able to levy a tax on value.

The proposal is to levy a tax on certain properties and the new proposals seem to vary from the Lib Dem version. The latter seems to have been proposed at a rate on the value in excess of £2 million, while the Labour proposals appear to be based on a rate on the full value.

The difference is huge, with the Labour concept being similar in nature to the cumulative basis of stamp duty rather than the additive basis of income tax. Clarity is required although clearly a tax on the excess will raise only a portion of a tax based upon full value. Although an excess basis seems to be fairer, it would avoid the issue of full levy on a £2 million value but a nil levy on a £1.999 million valuation.

The current basis of stamp duty where moving to a higher band requires a levy at a higher rate on the whole purchase price leads to no sales being agreed at a figure just above each threshold.

And in the case of a Mansion Tax the same would apply, with the likelihood of all residential units currently valued in the £2m to £2.3 m range seeing their value fall to below £2 million before the tax is introduced. Since the largest portion of currently taxable units will fall within these parameters, a good portion of potential tax receipt would inevitably be lost.

The proposal raises a raft of issues, many of which are peculiar to property.

Valuation of property is a very inexact science; if you ask ten valuers to place a value on a property, they may come up with ten different answers as to valuation. Value will vary according to the valuer’s opinions on items such as aspect, condition and age.

The name is conceptually incorrect as many of the residential to which the tax might apply will not be mansions but flats in Central London. Two up-two down houses in Chelsea and Fulham may also be caught. On the whole mansions around the country will not be caught as their value will not be high enough.

While domestic rates are payable not by the owner of a property but by the occupier, who may be a different party, it seems the Mansion Tax would be payable by an owner occupier. Rates are based on rateable value rather than market value leading to rates being a tax on occupation rather than ownership.

A revaluation of the domestic rates will do nothing towards valuation for Mansion Tax purposes as the concepts of rateable value and capital value are entirely different and effectively unrelated.

Houses are generally, but not universally held on a freehold tenure Assessment of value is relatively simple, being based largely upon the values of comparable houses produced by actual sales. Flat are, however, entirely different as value depends also upon unexpired lease term and other provisions of the lease.

With flats the leaseholder does not own the whole equity in the flat but just a portion with another party (the freeholder) also owning a portion; the sum of the two values will usually be less than the value of the whole freehold and in possession ( so value of whole £2 million but each part on its own £850,000 ).

This fact could lead to many residential properties having their title being put into trusts deliberately to avoid the tax.  The shorter term a lease has unexpired, the less attractive it is to buyers: the value will be lower than for a longer unexpired lease term.

So what value is to be applied in the valuation for assessment of Mansion Tax? This complexity means that for each flat being assessed, the lease will need to be read by the valuer or a solicitor – the cost will be large.

The state of repair and, in general, the “unexpired useful life” of the property will have a bearing on value, so valuation will need to involve an internal inspection. Particularly in the case of properties at high values where purchasers will want to buy a property in a good state or reduce the value by the cost to refurbish, the condition will have a big impact upon saleability and so upon value.

A Mansion Tax will actually dissuade owners from improving their property so the tax will lead to a reduction in the general condition of the country’s properties, so reducing the national wealth and eventually impacting adversely upon the average standard of living for everyone. The consequent decline in refurbishment and repair will have an adverse impact on the building trade and associated employment.

Valuation is based upon sale prices of comparable residential units. Currently a large number of sales are of newly developed units but it is generally acknowledged that these properties carry a “new” premium, so these cannot be directly used a comparables.

The ability to have the developer pay the stamp duty or purchaser’s legal costs or give other incentives, and just the intensity of marketing, ensures that new sales are not a fair indication of the value of existing houses and flats.

When non-new units are sold, the price will not include the benefit of the incentives, so the value will be below the new-sale price. New properties can therefore only be valued second hand properties for the purposes of the tax which has to be based on a future sale without incentives and not the original purchase price.

Furthermore many Central London developments are sold in South East Asia where the buyers seem to be prepared to pay a price which bears no resemblance to actual prices achieved in the UK, again complicating the issue of valuation.

These are just a few of the inevitable practical issues and anomalies thrown up by the idea of a Mansion tax as currently proposed. See Part 2 for a discussion of more questions raised by this proposal for a new means of redistribution.

Michael Lister is Chairman of the LFIG Treasury Policy Group

Mansion Tax Proposals, Taxation Fairness or Inefficiency: Part One
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