The controversial mansion tax will fail to deliver the revenue expected, according to new research. While this may come as no surprise to critics, for those caught in the tax trap, fear is mounting that they will be targeted to an even greater degree. Unfortunately, this concern isn't unfounded. In fact, it appears as though the only way the government will be able to generate the revenue it banked on is to rinse mansion owners further.
According to Knight Frank, the current proposal for a GBP 2 million threshold is insufficient to hit estimates. At this rate, a gross annual receipt of just GBP 1.3 billion will be generated. This is 24 per cent below the Liberal Democrat estimate of GBP 1.7 billion and 35 per cent lower than Labour's GBP 2 billion guess. At the current level of tax, mansion owners will be faced with an average annual payment of GBP 23,595.
To meet targets, mansion tax will need to be applied to a much lower threshold - a move that could damage the country's prime market and cripple many London property owners. Knight Frank claims to raise the targeted revenue expected by the Liberal Democrats, the value bracket for the levy will need to be reduced to GBP 1.5 million. To meet the GBP 2 billion expected by Labour, the threshold would have to be dropped even further to GBP 1.25 million. Indeed, these figures may even be overoptimistic once exemptions and the cost of collection are factored in.
For Londoners and those in the south-east of England, lowering the tax threshold will condemn the market. Some 84 per cent of all GBP 2 million+ properties are located in these two regions of the UK. What's more, one in ten of all such real estate is one or two bedroom flats. Should the qualification band be widened, those in the capital and south-east will be praying property prices stagnate - a dream unlikely to be realised as values pick up across the country.
Based on the assumption that historic rates of property growth are replicated, Knight Frank believes that the number of homes affected by mansion tax will increase from 55,000 to 777,500 over the course of the next 25 years.
Liam Bailey, head of research at Knight Frank, said: "Our calculations point to the real threat of the mansion tax threshold being lowered substantially in order to meet the revenue targets of the political parties. Even if the threshold is not lowered, it seems a fair assumption – given that it has remained at GBP 2 million since 2009 - that it would not be raised in line with future house price inflation thereby substantially increasing the number of properties affected by the tax."
It seems the main criticism towards the mansion tax is that it doesn't effectively target those that it sought to. Designed as a levy on the super-rich, the theory behind the tax holds that if you have more money, you should contribute more to the public purse. However, in practice the levy will fail to do its job in many instances. Not only does it fail to take into account mortgage payments, it doesn't encompass investors that own multiple properties below the qualification threshold. Instead, it seems families are the ones falling into the tax trap.
While you would think lowering the price bracket would make it possible to corner investors with multiple properties, the increased number of families snaffled up by the tax web would cancel out any benefits.
So what is the government to do to get the revenue it's after without crippling regional property markets? Suggestions seem to be slim on the ground but Tory chairman Grant Shapps believes the proposals should be abandoned entirely. "Once again, the true effect of Labour’s homes tax con is revealed, hitting hard-working families and pensioners the hardest," he said. "Labour start off calling this a mansion tax but before long their proposals would mean government snoopers reclassifying hundreds of thousands of modest flats and homes across the country as “mansions” and clobbering ordinary people who have worked hard and saved up to buy their home."
Without pointing the political finger, it is clear something has to be done to redress the balance if these proposals are to have legs in any form. Indeed, mansion tax looks set for a long future of controversy, as those for and against the levy in all its guises battle it out. However, in the interest of fairness, a solution to the London weighting dilemma needs to be reached if the reforms are to avoid crippling certain markets.
- Friday 06 September 2013