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Danby Bloch: The mansion tax effect on financial planning

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Now we have more details of the Labour party’s proposals for a mansion tax, it probably will not be the horror originally promised – although it could prove tough for some owners of expensive homes. 

Advisers need to understand the basics of how this potential new tax could operate and the implications for clients’ cashflows.

How likely is it there will be a mansion tax? If we have a Labour government after the May 2015 general election the chances are pretty high. The proposed tax seems to play well with most of the electorate: the people who will pay it are a small group, concentrated in London and the South-east, while the expected beneficiary is the popular NHS.

Reforming council tax, which is based on property values about a quarter of a century old, would probably be more logical and sensible and might even generate more revenue but it would potentially affect many more people and, unsurprisingly, politicians of all colours shy away from the hugely unpopular territory occupied by the fiscal ghosts of the hated domestic rates and the even more despised poll tax. The mansion tax seems to help the many and hurt the few, which is electorally almost irresistible.

So what should advisers’ clients brace themselves to pay? The mansion tax has, of course, been cunningly named to seem to apply to unfeasibly large edifices although it will apply to any residential property worth more than £2m. Estate agents Savills estimates about 40,000 residential properties are worth between £2m and £3m and about 57,000 homes are worth over £3m. So quite a few clients could be affected – mostly in London and the South-east.

The proposed tax would operate on a slab basis with a flat-rate charge applying to each slab or band of property value. The bottom band would be £2m–£3m and shadow chancellor Ed Balls has announced the flat-rate charge for anyone in that slab would be £250 a month or £3,000 a year. This may be less threatening but is still a significant extra item of expenditure to include in the cashflow forecast of anyone with such a property. Retired clients could be particularly affected.

A client with such a property would also be concerned whether the tax would have a significant impact on the value of their home for inheritance tax purposes. The effect on values could also be important if they were considering downsizing. The market has already cooled somewhat but it is hard to see that an extra £3,000 a year of costs would put much of a dent into a property worth up to a thousand times that amount. It is bound to have a bit of an impact at the margin, especially around £3m because of the big increase in tax that a slightly higher valuation might give.

The position could be a lot more serious for more expensive properties. The aim of the tax is to generate a total £1.2bn for the NHS – as extra spending, not to cut the deficit. If the 40,000 lower-band homes (at £3,000 each) produce a mere £120m a year, it is up to the remaining 57,000 to provide the rest at an average of £19,000 a year per home. Advisers are likely to have fewer clients in this category but they exist. 

Room for argument

It is hard to project the rates of tax above this because we lack the information but a guide to what the tax brackets or slabs might be is provided by the annual tax on enveloped dwellings, which is currently levied on homes held in corporate wrappers. The plan is for owners to provide their own valuations. Zoopla and other websites should make this much easier than it was in the past although there will be room for argument, especially around slabs. 

Balls has proposed to allow property owners with incomes of less than £42,000 a year to roll up the tax liability until they die, at which point it would be payable. There are no details about the rate of interest that would presumably be charged on the rolled-over tax, nor how it would be treated for IHT. 

He has also said the thresholds would be increased in line with house prices to stop more properties being dragged into the net in the future. Advisers will no doubt be asked how it may be possible to avoid this tax if it comes to pass. It is all speculative but there is talk of splitting properties so the separate components fall below the threshold. 

There are also suggestions that savings may be achieved by the clever use of trusts but this sort of planning is not really possible in the absence of the legislation.

Danby Bloch is editorial director of Taxbriefs Financial Publishing

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  1. In my neighbourhood it would seem quite a few would be affected. However if this tax came in one must ask what would the likely effect be on prices? A house worth (say) £2.5 million may well drop £500.001. Much of course will depend on who does the valuations at the local councils and how consistent they will be. Judging by the shenanigans at my own local council I could well see some brown envelopes changing hands.

    However all that apart if it comes down to it and if I am asked for advice the simplest course would be to emigrate – if at all possible. Don’t forget that the owners being better off than average probably have more flexibility than most and this may well be a viable proposition. Indeed I have a few clients whom live in the Balearics and have their businesses in the UK. It’s amazing what the modern internet will allow.
    If I was caught (highly unlikely unless prices go ballistic!) I would certainly leave.

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