The mansion tax: how to make it work for Londoners

By introducing a mansion tax based on the last sale price of a property, rather than the current market value, the tax would hit only those who could afford to pay it, writes Tom Copley.

By introducing a mansion tax based on the last sale price of a property, rather than the current market value, the tax would hit only those who could afford to pay it, writes Tom Copley

Let’s face it, Council Tax is ridiculous. Taxing people based on the value of their property in 1991 is a farcical way for local authorities to raise money.

Nor does it afford many councils a sense of financial independence given that local authorities raise on average only a quarter of their total annual budget from it – being mainly reliant on grants from central government for the rest of their income.

This has made it incredibly difficult for those councils to mitigate huge cuts being passed down to them by the coalition government, as it tries to shift the responsibility for cuts onto local authorities.

The inflexibility of Council Tax also prevents local authorities from applying it more progressively. Given that Council Tax bands are all set in relation to the tax on a Band D property, councils can’t raise the level on the most expensive properties without raising it for everyone in the borough, including the poorest.

Council Tax is a politically sensitive issue, and successive governments have shied away from reforming or replacing it. It seems unlikely that either Labour or the Tories will propose any radical changes to Council Tax at the next election.

However, over recent years there have been growing calls to introduce a so-called ‘mansion tax’ as an additional tax on properties worth more than, say, £1 million or £2 million.

The problem in London is that, with average house prices already soaring towards the half a million mark large numbers of people will fall into the mansion tax bracket even though they don’t live in anything resembling a mansion. Many of these people will be asset rich but income poor, having bought their homes years ago when property was cheap.

Are these really the people we want to be paying a mansion tax?

There is, however, a potential solution; one which would catch only the genuinely wealthy and leave those on low and average incomes but who happen to live in an expensive house unscathed.

The Land Registry holds data on every single property transaction which takes place in Britain. This includes the sale price of the property. By introducing a mansion tax based on the last sale price of a property, rather than the current market value, the tax would hit only those who could afford to pay it. It would also allow the tax to be set at a higher level, thus raising a larger amount from a smaller number of much wealthier people.

Let’s say you’re a single pensioner who bought your house in Hampstead for £20,000 in the 1970s. It’s now worth in excess of £1 million. Based on the last sale price of the property you would not be hit by the mansion tax. Now let’s say you decided to sell your house in order to downsize. The new buyer would pay the mansion tax because the property was sold for more than £1 million.

There are also questions over where the money raised from a mansion tax should go and what it should be spent on. In London, which will inevitably feel the greatest impact of a mansion tax, there is a strong case in the short to medium term for the proceeds to be ringfenced to tackle the housing crisis in the city.

A larger number of homes in London being hit by a mansion tax would suggest that a housing shortage has increased house prices here; it would therefore seem fair for such taxes to be reinvested locally in order to mitigate this shortage. A fifty/fifty split between the Mayor’s Affordable Homes Programme and local authority council house building programmes would seem a sensible way to distribute the funds.

In the longer term, perhaps local authorities should be given more freedom both to set the level of and keep the proceeds from any mansion tax. This ought to be part of wider reform of local taxation giving councils more flexibility and financial autonomy.

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