The Independent View: Location, location … taxation? The benefits of a locally-driven mansion tax

A tax on high-value property is a long-standing Liberal Democrat ambition, yet one which remains controversial. If and when it is adopted by government, it must be directed locally if it is to address key concerns.

The chief benefit of a mansion tax is to discourage purely speculative housing purchases. Falling demand for luxury property from prospective owners unwilling to pay tax on homes they are not inhabiting would encourage a greater focus from developers on homes affordable to the majority.

Of particular concern is the 70% of newly built homes in central London bought by non-UK residents in 2013. Existing housing stock in an under-supplied market must be used more efficiently. Combined with other new taxes on such property and a strengthening pound, the effect of a targeted mansion tax could be especially strong on ‘non-dom’ owners.

This complements the inherent advantage of a mansion tax. By taxing value arising from features inherent to the property such as its location or design rather than endogenous decision-making by economic agents, it avoids the negative incentive effects associated with income tax. 

Yet the mansion tax suffers (among other factors) from the impression that it treats London as a cash cow to be milked – as Jim Murphy can testify. This critique can however be avoided, firstly by giving local authorities responsibility for the tax’s administration and the revenue it raises in their area, and secondly by ringfencing that revenue so that it is diverted into new local housing and infrastructure.

In this way, those at the top of the housing ladder who have benefitted from price rises for which they were not responsible can help people in their area unable to buy property due to those same price rises – and the most revenue for new construction is generated where the market is most overheated.

The tax should be designed to allow limited regional variation at local authorities’ discretion. Central government could for instance set a lower limit on the applicable tax rate and house value where the tax comes into effect, with local authorities able to fix the final value of these variables at or above this. This would offer flexibility to take account of the local price context, but would also give local authorities greater responsibility and accountability over the funding they are able to raise for local housebuilding.

In addition, a similar tax might usefully be levied on developers who construct high value property in the first place. This would in itself encourage the development of affordable rather than high-value housing; this effect could then be reinforced if the revenues raised were recycled to provide tax relief to those developers who meet targets agreed between themselves and local authorities for the construction of affordable and mid-range property locally.

With both Natalie Elphicke and Keith House’s government-commissioned report and the Lyons Review for Labour recommending that local authorities expand their role in regional housebuilding, these proposals would offer useful weapons in local government’s armoury. Linking the mansion tax to the devolution zeitgeist can only reinforce its already strong appeal.

The Independent View‘ is a slot on Lib Dem Voice which allows those from beyond the party to contribute to debates we believe are of interest to LDV’s readers. Please email [email protected] if you are interested in contributing.

* Duncan Sim is a research assistant at Respublica

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37 Comments

  • A simple way to is to change ownership rules on property.
    1. All property owned in the UK has to be by a person or a company resident in the UK for tax purposes.
    2. Those resident in the UK pay normal council tax, stamp duty and inheritance tax.
    3. Properties owned by companies where the directors are not resident in the UK pay Capital Gains Tax on the increase in value of the property when sold. If a British person moves abroad for tax purposes, then the property has to be transferred to a company registered in the UK. A British person living abroad but visits the UK would still be expected for the state to protect them and or care for them.
    4. A higher rate of council tax could be imposed on property where people live overseas for tax purposes: say 10-20% premium..
    Basically any foreigner has to pay for the privilege of living in the UK . People have died , been tortured and maimed while fighting for our freedoms . Britain was bankrupt by 1942 from saving the World. Britain then spent from 1945 onwards rebuilding and recovering from war damage and paying our debts. Many elderly people either fought for this country or rebuilt it after the war. Foreigners paying tax on the increase in the value of property is saying thank you to all those who died for our freedoms. The post war construction involved massive amounts of hard manual labour: working out of door in construction jobs in winter or in the mines is hard, dangerous and difficult work.

  • Matthew Huntbach 25th Mar '15 - 10:18am


    Yet the mansion tax suffers (among other factors) from the impression that it treats London as a cash cow to be milked – as Jim Murphy can testify. This critique can however be avoided, firstly by giving local authorities responsibility for the tax’s administration and the revenue it raises in their area, and secondly by ringfencing that revenue so that it is diverted into new local housing and infrastructure.

    No, NO, NO!!

    A tax like this MUST be used to counter the way wealth is getting sucked into fewer hands and concentrated there. A prime purpose of a tax on high value properties must be to rebalance the economy and stop the way high house prices in London shut the gates on everyone else. Keeping the money raised in London won’t do that.

    The claim that the “mansion tax” is an attack on London is very dubious anyway. It comes from horrible stuck-up people who think “London” just means the wealthy sort that they mix with, and cannot even see all those others around them who aren’t wealthy as they are, who aren’t living in big houses as they are, who are suffering from high house prices because it means they are squeezed out of somewhere to live, not benefitting. I live in a three-bedroom house in a not so stuck-up part of London, and you could buy six houses like the one I live in for the amount proposed as where “Mansion Tax” kicks in. The suggestion that the “Mansion Tax” is something that will hit normal Londoners is nonsense – it comes from people who haven’t a clue how most Londoners live.

    By making it unprofitable to hold onto housing you do not need, and thus bringing down prices pushed up by “investors”, a tax on high value properties will be a boon to ordinary Londoners, it doesn’t need an insistence that the revenue raised stays in London to make it that.

  • Lorne Gifford 25th Mar '15 - 10:48am

    The interesting thing about Mansion Tax is that it won’t work if only applied to ‘mansions’. £1.2bn annual revenue, yes possibly, but it has been shown on numerous occasions that there will also be a £1.5 to 2.0bn fall in stamp duty revenue due to the associated devaluation of mansions that have an everlasting tax liability connected to them.

    It has also been shown that Mansion tax only generates significant income when applied to the whole housing population as a general ‘Property Ownership Tax’. This is very unpopular though so to get it introduced you have to do what Greece did.

    Introduce it as a tax on Mansions (Greece 2008) and then quickly evolve it to anything better than average (as Greece had done by 2013). The people that vote for a ‘tax someone else will pay’ end up paying it themselves.

    It worked perfectly with Stamp duty, inheritance tax, etc, so of course politicians assume we’re all to thick to see it coming. Unfortunately for us though, it appears they may be right on that assumption!

  • Richard Walters 25th Mar '15 - 1:28pm

    If the aim is to tax ‘Mansions’ surely the Window Tax , introduced in 1696 under King William III is better designed to impose tax relative to the prosperity of the taxpayer. In London a terraced or semi-detached house in a half decent suburb falls into the proposed Mansion Tax net whereas in the regions a truly large property, aka a real mansion, could slip through the net. Why should normal people living in small homes in London be tagged as owners of a ‘Mansion’ and taxed in such a punitive way?

  • Caracatus

    “Land Value Tax on the other hand is a much better and coherent replacement for Council Tax. So why doesn’t the party promote it ?”

    I find myself agreeing with you, oh dear something must be wrong I must have a sit down…

    Lorne Gifford
    “This is very unpopular though so to get it introduced you have to do what Greece did.

    Introduce it as a tax on Mansions (Greece 2008) and then quickly evolve it to anything better than average (as Greece had done by 2013). The people that vote for a ‘tax someone else will pay’ end up paying it themselves.

    It worked perfectly with Stamp duty, inheritance tax, etc, so of course politicians assume we’re all to thick to see it coming. Unfortunately for us though, it appears they may be right on that assumption!”

    Remind me why are the public cynical about politicians and politics in the UK?

    That is the worst proposal I have ever heard for introducing a LVT. It has to be done over an extended period with it starting very low with a clear figure it will eventually reach, it is gradually increased as the other taxes it is replacing are gradually lowered. This allows people (and therefore the property market) time to re adjust and move when they have the opportunity.

    Dishonest shock therapy would be disasterous.

  • Gwynfor Tyley 25th Mar '15 - 1:57pm

    This is all just fiddling about when what is needed is a total reform of property taxation.
    1, revalue all properties to current values and update them annually. This is not difficult given modern data tools.
    2, Reform council tax. Apply increasing %s at higher property levels eg 1% on the first £x, 2% on the next £y
    3, The levels at which the %s change can be set locally to reflect local valuations but rich areas should still be expected to subsidise poorer areas
    4, You have the option of different (higher) rates for foreign ownership, second homes etc and discounts for eg the disabled
    5, Because people in more valuable houses will end up paying significantly more, they should not be prevented from downshifting to match their outgoings with their income – therefore stamp duty on first properties should be abolished – it distorts markets horribly.
    6, Stamp duty can still be applied to second homes, buy to let, purchases by foreign (non EU) entities.

    Apart from creating a housing market that is just so much more sensible, progressive and reliable, I believe it will have one significant additional benefit:

    There are 25 million unoccupied bedrooms in this country. By effectively putting a cost on the additional bedrooms and by removing stamp duty that acts as a bar to moving, it will encourage people to better match their property with their needs eg get the empty nesters to downsize freeing up the property for another family. This in turn will reduce the need to build more houses – if only 10% of the unoccupied bedrooms are freed up, that is the equivalent of over 800,000 3 bedroom homes.

    Now here may be many political reasons why this policy would be unpopular, but it is undoubtedly the right thing to do. Are we, the Lib Dems, going to be a party of principle or a party of petty politicking?

    With 25 million unoccupied bedrooms, it is clear that the UK has plenty of housing – it’s just not being used!

  • Matthew Huntbach 25th Mar '15 - 2:12pm

    Caracatus

    The Mansion Tax is a pathetic tax which neither makes ‘the rich’ pay their fair share or addresses the many flaws of Council Tax. It raises hardly any money and is really only applicable to some parts of London.

    The idea was surely just to dip a toe into the water of reintroducing a property tax, starting with one that wouldn’t affect most people. I’m not sure whether it was ever officially called a “Mansion Tax”, but it looks like this name for it was invented in a way to get across the message “Don’t worry, it won’t apply to you”.

    Land Value Tax on the other hand is a much better and coherent replacement for Council Tax. So why doesn’t the party promote it ?

    Er, despite what’s written above have you not come across the howls of anguish and calls of unfairness made against this toe-dipping property tax. The little old lady in the big house has been wheeled out as usual to bring us all into tears as she tells us she has no income to pay this tax, and so we are forcing her out of where she’s lived all her life, and it isn’t her fault it costs her tuppence-ha’penny to buy it back in the days when the place it’s in was considered slum territory but since then has been gentrified and bought up by bankers so it’s now valued at two-and-half-million.

    Well, okay, so how are people going to react when you propose to introduce a REAL property tax that doesn’t just hit a tiny proportion of the population, actually it hits hundreds of thousands of little old ladies who have no way to pay it? I know the answer to that, but will our opponents give us chance to give it before it’s drowned out by the howls and tears?

    I do actually support LVT, but I don’t think it’s going to be an easy thing to sell as you seem to suppose.

  • Matthew Huntbach 25th Mar '15 - 2:14pm

    Gwynfor Tyley

    There are 25 million unoccupied bedrooms in this country. By effectively putting a cost on the additional bedrooms and by removing stamp duty that acts as a bar to moving,

    I.e., a “bedroom tax”. We’ve tried that, in a limited form. Remind me how well it went down.

  • Duncan Sim

    Perhaps you want to be a little more careful about your justification of your case liking to a Reuters article which cites Savills research but doesn’t link to it. The article claims 70% are “foreign investors” (you turn this in to non-UK resident) yet the only Savills report I can find from that year has figures of 26% UK born resident, 20% foreign born UK resident 1st homes, 11% second homes and 43% purchased for the purpose of renting out.

    Your interpretation comes across in a manner which I don’t think you intended. These figures quickly morph as each is reported on and on, you have suffered from Chinese whispers in your research.

  • Gwynfor Tyley 25th Mar '15 - 3:22pm

    Matthew Huntbach

    A limited form was the problem – so much for all in it together – instead it should be applied to everyone.

    As I said in my post, do we not do it because it would be unpopular or do we do it because it is right.

    Besides, we are not going to be able to do anything for some time as we will not be in power, but we can frame the debate so that others can do the right thing.

  • * Duncan Sim is a research assistant at Respublica

    So not that “independent” a view. ResPublica is a Conservative pressure group, isn’t it? It was founded in 2009 and at its launch was David Cameron MP — remember him?

  • People have emotional attachments to their homes. Elderly, especially those infirm and with poor sight should not be forced from their homes and many would find this traumatic. We have property rights in this country which have been enshrined since 1215, if not earlier. Where property is used as an investment or where people do not pay British Tax , then increase in value should be treated as capital gains when it is sold. The question needs to be asked how much do the elderly receive in benefit from the Council Tax as they no longer have children?

  • Gwynfor Tyley 25th Mar '15 - 9:12pm

    Caracatus – if they choose to down shift then they shouldn’t be penalised by stamp duty.

    Charlie – it’s fine to have an emotional attachment but that is no reason why they shouldn’t pay tax based on its value. And really, if they are old and infirm, wouldn’t they be better off moving to a smaller more manageable property anyway. Government should ensure there are sufficient homes suitable for the old and infirm preferably where they can have a mutually supportive community whilst at the same time retaining their independence and making the provision of social care more efficient.

  • Stevan Rose 25th Mar '15 - 9:28pm

    The purpose of this tax seems unclear. Is it pure revenue raising, is it wealth redistribution, is it to deal with excessive housing costs in London and the South East. If you don’t have a clear purpose you can’t sell it but you are exposed to multiple attacks. You could only sell this to me as a brake on housing costs but to do so it has to be far better thought out in detail. As it is I would much rather use stamp duty than mansion tax as weapon of choice with double, treble or quadruple council tax on unoccupied domestic premises after a grace period. Increase supply and reduce unit costs.

  • Charlie

    I have an emotional attachment to many things it doesn’t absolve me of my responsibilities regarding tax.

    There are ways a LVT could be dealt with to accommodate the elderly, the Mansion Tax actually has more problems in this regard due to the cliff edge, but the problem with a mansion tax is it undermines LVT.

  • Gwynfor Tyley 26th Mar '15 - 9:30am

    Stevan,

    Stamp duty distorts the housing market dreadfully – especially in the South East. For instance, whilst not as common as many people think, £1m houses are not uncommon but the stamp duty on the purchase of a £1m house is £43,750 which will act as a terrible block on many people moving to a house that more suits their situation. It is also avoidable and people just stay put to avoid paying it.

  • The way to obtain tax is to treat increase in value when a property is sold as capital gains for those who are not registered for tax in the UK and second homes.

  • Matthew Huntbach 26th Mar '15 - 11:54am

    Caracatus

    Yep I have heard them from Bill Oddie to Mylenne Class and the answer is the same, don’t like the tax, move to a cheaper property.

    Yep, and you try saying that when you’re standing as a candidate in an election.

    I have. It didn’t go down well. The Tories denounced me as “Moscow’s candidate”, and I had little old ladies on the phone to me saying “I used to vote Liberal, but after hearing what you said, never again”.

    I agree with LVT and the arguments for it. All I’m saying is that don’t think it’s an easy sell.

  • Matthew Huntbach 26th Mar '15 - 11:54am

    Gwynfor Tyley

    As I said in my post, do we not do it because it would be unpopular or do we do it because it is right.

    Please see above.

  • Charlie

    This is already the case. The point is that LVT is a much more efficient form of tax with lower dead weight cost. It is not a panacea but an improvement.

  • “eg get the empty nesters to downsize freeing up the property for another family”

    Hallelujah.

    I cried when I watched the previous owner of my house walk away with a pile of cash, he having managed to buy that and a second property in France on one income when I can barely afford it with two incomes and a mortgage that stretches until I’m over 70.

    And they wonder why there’s inter-generational conflict.

  • Matthew Huntbach 26th Mar '15 - 2:02pm

    Stevan Rose

    The purpose of this tax seems unclear. Is it pure revenue raising, is it wealth redistribution, is it to deal with excessive housing costs in London and the South East. If you don’t have a clear purpose you can’t sell it but you are exposed to multiple attacks.

    The purpose of this, as any tax, is to raise money for government services. If people want an NHS, etc, it has to be paid for. At the moment we DON’T raise enough money to pay for the NHS and the other things people want from government. If people don’t want to pay the taxes that would raise the money, then fine, we will have to scrap the NHS as it exists. I don’t believe we can cut “welfare” any further as its claimed, or at least not unless we compulsory purchase all those “buy to let” properties that we shell out money for to the landlord in housing benefit, thanks to the Tories wrecking council housing in past decades. Or, find a way of hygienically disposing of all those people who are on welfare, and quite frankly are never going to come off it.

    There are huge amounts of money sloshing around due to housing, as Tabman puts it. Why should not some of this be taxed instead of money people have earned by working being taxed? If it also has the beneficial effect of bringing house prices down and so making housing more accessible, isn’t that a good supplementary thing? We have taxes on tobacco both to raise government income and because they have the side effect of encouraging people not to smoke. Do you say they should be abolished because of this dual purpose?

    Why do people think it fine that people who are struggling to buy housing get big taxes on their income, but once you have that housing you never have to pay any tax on it?

  • Matthew – one nicety I would add to that is that you need to factor in something to cover the amount of debt people have had to service.

    For argument’s sake, if I bought a property for £150k with a £100k mortgage and sold it for £200k, I shouldn’t be taxed on the full value of the £200k but only on the bit I owned (say I’d paid the debt down to £90k that would then be £110k)

  • PSI
    The problem appears some farmland. The value of some top farmland exceeds the income. LVT could lead to additional costs for people who own valuable farmland and whose income is from farming; as opposed to financiers who are hobby farmers.

    Where peoples wealth has increased through property is houses in S England and certain areas outside of the region. By allowing those people who are non-resident fro tax purposes not to be taxed on their wealth when they have not contributed to this country is part of the problem. Foreigners who buy property are not cash poor, many elderly are.

    When it comes to raising taxes more thought needs to be given to reducing costs. Lean manufacturing and value engineering appear alien concepts to politicians and the public sector. Prove to me that all money is wisely spent before asking for more. Successful companies spend a lot of time keeping their cost bases down.

  • Charlie

    I am advocating using LVT to replace other taxes (what anyone else wants to do after that is a decision for the electorate after a trasition) so your point about spending isn’t relevant to my case for LVT.

  • Charlie

    second homes are subject to CGT. foreign owners are now subject to CGT. Neither of these are arguments against LVT.

  • Charlie

    If Farmland is generating less than the LVT on it that tells you it has been put to the wrong use.

    I doubt that you would ever find an occasion where that would occour the market price of lad is skewed but generally not pushing farmland without planning permission that high.

    You have to also bear in mind that the situation will be dynamic so you have to consider the market responce as well. Which is why a LVT would need to be phased in.

  • Stevan Rose 26th Mar '15 - 9:10pm

    Matthew Huntbach.

    You didn’t sell it to me. I remain opposed. There are more effective and fairer ways, to my mind, of raising more money for the NHS. Including allowing voluntary co-payments (yes I tried). I would reverse the massive corporation tax cuts for big business and calculate the liability where the profit is made not where it is repatriated to. I would say that is exceptionally easy to sell too. Plus the council tax multiplier for non-occupancy, kept in the same area but ring fenced for social housing.

  • Philip Thomas 26th Mar '15 - 9:26pm

    Re: only UK residents can own UK property: this seems extremely dangerous to me. Bad enough that the government expels people from the UK without them confiscating their property in the bargain!

  • High location values in London are the result of the scaling effect of agglomeration and the in-elasticity of Land. As by definition, Land costs nothing to produce.

    Location values are as much of a result of the the work, effort, enterprise of Londoners as the unimproved value of North Sea oil is a result of the work, effort and enterprise of the Scots.

    Which is why like North Sea Oil, the land value under London, and the rest of the UK is a resource that should be equally shared.

    It’s a real shame people cannot grasp this point, as the failure to do so leads to economic inefficiency, inequality and division.

  • Phillip Thomas.
    No . Non British Tax Payers have to set up companies in the UK to own property.

    PSI
    I would suggest that a nation needs to decide on what to spend money and then think about how to raise. All companies which succeed have to consider how to minimise their cost base and produce maximum output with minimum resources. The Japanese focus on Quality Assurance was in part due to the realisation that repairing faulty components cost money- doing it correctly the first time was the cheapest method. I have yet come across any state organisation which considers all it’s activities and tries to minimise it’s costs. Private companies spend much time managing their supply chain and QA to reduce costs.

    Humans evolved from apes because we learnt to use energy more efficiently; walking on 4 legs rather than 2 enables an animal to travel 4 times as far on the same amount of energy.

    If we are to have a LVT, then we need to examine how money is spent by the state.

  • Charlie

    I think you are conflating two issue. The state spending should be constantly reviewed to ensure efficiency, not just because a tax change could be on the way.

    What ever the outcome I can’t imagine even a very harsh spending restriction by a very hard line Tory Government taking spending below 30% of GDP so we can accept there will need to identify the most effective and efficient forms of taxation to raise those funds. LVT is a tax that minimises the dead weight cost (compared with payroll taxes or capital taxes). We also shouldn’t be over dependent on one firm of taxation so LVT would not be the only tax and we would probably still have an income tax and some form of capital tax (preferably not the current Corp Tax).

    There would have to be some form of system for revenue sharing for the different layers of governement too, there would need to be a significant tranistion period but none of this changes the sensible destination of having LVT.

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