The ‘mansion tax’ will be worth it if stamp duty is slashed

    12 February 2020

    There must be many reasons why former Labour voters in the Midlands and the North voted Conservative in December, but I don’t suspect that one of those reasons was to spare the owners of mansions and penthouses from paying more council tax.   That, however, is what some Conservative MPs seem to think.    News broke at the weekend that the Chancellor, Sajid Javid, is thinking of introducing some kind of ‘mansion tax’ in the Budget. That immediately sent some backbenchers into meltdown, with one saying of his own government: “They have got to get rid of this idea that people believe in the politics of jealousy. If you want to tax the rich out of the country you vote Labour or Liberal Democrat.”

    Well, maybe, but there’s a lot of scope for increasing property taxes for the wealthy before you start forcing them out of the country. There is a big difference between taxes which are punitive – such as Corbyn and McDonnell would have favoured –and those which are simply fair. It is hard to see how council tax, as it is levied at present, can possibly be described as such. The council tax system dates from John Major’s time and was a hurried replacement for the reviled Poll Tax, which in turn was a replacement for the domestic rates. The latter were unpopular because led to high bills for low income pensioners living in large family houses which they had bought when they were earning good salaries.  Domestic rates were calculated according to the theoretical rent which might be derived from a property – as adjudged by a valuation officer.

    The poll tax did away with property taxes altogether and instead taxed people for simply existing – which has never been popular.   Moreover, because councils had widely-varying needs for revenue, it led to extraordinary unfairness. Residents of Wandsworth, for example, paid absolutely nothing in the first year of the poll tax, 1990/91, while those in Hackney paid over £500.   For those on low incomes, this could easily amount to more than 10 percent of their income at the time. The Conservatives liked to pretend that this differential was all down to efficiency, but this argument always was bunk. Sure, there were Labour councils which wasted large amounts of money – Wandsworth was able to set its poll tax at zero not because it didn’t spend any money but because its funds were bulked up by a central government grant that was more generous than many other London boroughs.

    So the Poll Tax went, and Mrs Thatcher with it. The Council Tax was a return to property-based taxation, but one that was supposed to be fairer than the old domestic rate. The owners of the largest properties – those valued at more than £320,000 at the time – would pay three times that of the smallest ones. But still it is grossly unfair. Own a £10 million penthouse in Westminster, for example, and you will pay £1510 in council tax. Own a one bedroom basement flat in Nottingham and you will pay £1358. Moreover, trying to assess new properties for council tax has become reduced to guessing what they might have been worth had they existed 29 years ago.

    Javid could put this right by abolishing council tax and replacing it with a straightforward annual property tax levied, say, at a rate equivalent to 0.5 percent of the value of the property.  If he used the extra revenue raised to reduce stamp duty – which is a far bigger burden for people trying to move up the property ladder – it could be a real vote-winner. Moreover, if he based the tax on the price a property sold for the last time it was sold, uprated for inflation, it would avoid the expense of having to value properties for tax purposes.  It would also avoid penalising long-established residents of neighbourhoods undergoing gentrification.   If you tax according to current market value it can mean a big hit for people who bought their homes long before the millionaires moved in.   But if you base the tax on what the current owners paid in, say, 1980, they would forever be paying tax based on the area to which they moved, not what it has become in the intervening years.

    Under an annual 0.5 percent levy, the owner of a £30,000 flat in Nottingham would pay £150 a year and the owner of a £10 million penthouse in Westminster £50,000.     Would that frighten away billionaires? Hardly – New York has property taxes which cost people on $100,000 an average of 3.7 percent of their annual earnings, and it seems to manage to hold on to its billionaires. What matters for the Tories is to find a way of encouraging home-ownership among the masses of strivers, not to promote London property as an asset class for the super-wealthy. The Chancellor can do that through a fairer property tax – and using the extra revenue to slash stamp duty.