Tuesday, 1 July 2014

More fun with Mansion Tax...

… in yesterday's Evening Standard, a fine, rich seam of KLN's…

Labour's 'unfair' mansion tax will hit five London boroughs hardest, but palatial country homes under £2m would be exempt

That's because the tax is actually a tax on homes worth more than £2 million, and not a tax on "palatial homes". Most of those homes are in certain London boroughs. Why this makes the tax and more or less unfair than if they were scattered more evenly around the country is never made clear.

Richard Barber, partner at central London estate agency, W.A.Ellis, said: “A middle-income 30-something who purchased a family home for £900,000 eight years ago in an ordinary Fulham or Wandsworth street of terraced houses, that house may well now have a price tag in excess of £2 million.

Yes, and like all middle-income 30-somethings, he had no problems rustling up a the deposit and meeting the mortgage repayments on a £900,000 house. Maybe his wife's got a part-time job as well, or something? That £1.1 million windfall, tax-free capital gain doesn't even come into it, don't all middle-income 30-somethings expect the odd bit of good luck like that?

The Knight Frank study also showed how rapidly rising prices in London have dragged increasing numbers of homes into the mansion tax bracket. For example a home in Islington valued at £1.3 million in November 2009 will now be liable.

Yes, that's because it's potential selling price has gone up by £700,000 and is now over the threshold.

Liam Bailey, head of residential research at Knight Frank, said a new Labour government would need to tread cautiously as a draconian mansion tax could start to hit the wider market in London and beyond.

He said: “My guess is that they won’t be able to push the tax too high because that will start to damage values and affect income from stamp duty, inheritance tax and capital gains tax.”

Aha, so the tax will reduce SDLT revenues, will it? That's a Killer Argument Against, is it? See below.

… Trevor Abrahmsohn, managing director of estate agents Glentree International, said: “[The Poor Widow In A Mansion] is likely to be asset rich but income poor but will be planning to pass on her wealth to her family. Under Mr Balls proposal whatever is left after the accumulation of mansion tax is extracted will then be hit by inheritance tax. There will be nothing left.”

Ed Balls intends to extend the ATED to all housing, whoever owns it, so the tax on a home with a current selling price of £2 - £5 million will be £14,000 a year. So let's start with a home worth £3 million and assume the Poor Widow lives another thirty years, so when she dies, the deferred tax payable will be £420,000, leaving £2,560,000 liable to inheritance tax = £772,000 (assume she can use her late husband's nil rate band), so her family gets £1,808,000.

Seeing as the Poor Widow only paid a few shillings for the house and has lived there rent and tax free for most of her life, that's still an excellent return on her paltry investment, and looks like a damn' sight more than "nothing" to me.

The equal and opposite Killer Arguments were presented in the readers' letters (30 June, page 53):

NO ONE in their right minds would accept Ed Ball's mansion tax deferment regime if they couldn't afford to pay.

The reality is that they would have to move and trade down, providing a further windfall to HMRC as 4% stamp duty becomes payable, which no doubt Mr Balls has calculated already.

James Owen

No, they wouldn't "have to move", that's an outright lie, it's optional, he just said so himself.

But can the Homeys get their stories straight:

a) Would the Mansion Tax reduce or increase Stamp Duty Land Tax revenues? And if so, which is a good thing and which is a bad thing?

b) If rolling up and deferring leaves the heirs with "nothing" (another outright lie, but run with it), is so terrible, what's wrong with a one-off 4% (or more likely, 3%) hit on the new smaller place the Poor Widow buys, enabling her to pass the rest of the unearned and untaxed multi-million £ gain to her heirs right now, Inheritance Tax-free? And her new home will easily be below the Inheritance Tax threshold as well, job done, sorted, all for a one-off payment of under £15,000.


Bayard said...

"So let's start with a home worth £3 million and assume the Poor Widow lives another thirty years, so when she dies, the deferred tax payable will be £420,000,"

That's like a 14% reduction in the selling price, not unlikely in a "sticky" housing market, or when a quick sale is required.

Mark Wadsworth said...

B, isn't that £420,000 also roughly equal to the entirely unearned increase in the value of the home over the past couple of years?

The Stigler said...

somewhat related:

Antiques Roadshow had the largest private home in Europe on - Wentworth Woodhouse near Rotherham. It has over 300 rooms and cost £1.5m to buy.

Dinero said...

Yes Stigler that was a big lump.


But sureley it demonstrates why the MT does not satisfy the Henry George characteristics of an LVT. Because the House and not just the land is being taxed , people working and working in London and living there because the work is there pay but the landed Gentry get off once again. If just the square feet of land under a London house was taxed then it would be a comparable rate to the acres around a large detached Manor house surrounded by land in the countryside.

relevant -


Mark Wadsworth said...

TS, exactly.

Din, MT is clearly not as good as proper LVT, but nonetheless, it ends up with a similar result.

How many homes have a rebuild cost/value anywhere near £2 million? A few dozen, perhaps.

So the land value of a London home is 80%, 90% of its current selling price, so a tax on the selling price above £2 million only touches the land part and goes nowhere near the building.

Same applies to nice big country houses - they have a much higher rebuild cost/value and sell for much lower amounts. So perhaps only 30%, 40% of the value is land, so 99 out of 100 nice country houses are not taxed (rightly so, in the circumstances - LVT is primarily about urban, developed land, not the countryside).

Mark Wadsworth said...

Din, final thought, actually it doesn't matter how the LVT is calculated as long as it is not a higher amount that the site premium.

Seeing as the MT starts at a modest £14,000 a year for a £2 million home, there is no way on earth that the site premium/land only value is less than £14,000 a year.

Clearly, it's best if the effective rate is quite similar for all plots of land and quite high, but anything is better than nothing.

Dinero said...

You say that LVT is primarily about urban, developed land, not the countryside

Well in that case the tax is raised not from land it is raised from the productivity of those living in the city.

mombers said...

@Dinero - how is that different from income tax, VAT, etc? Except that the latter have huge deadweight costs and are morally suspect as the productivity of those living in the city will be syphoned off into land values no matter what. I'd much rather pay rent only than rent and tax. I'm a first class citizen now (bought a flat last year :-() but I'd do very well out of a £10k increase in council tax offset by a £10k decrease in income tax / NI.

mombers said...

London will BENEFIT most from a mansion tax. The vast majority of people in London do not live in £2m houses. Many of these houses are under-occupied and a small nudge from MT will bring some of these back into more productive use via coming onto the market.
If there is such a concern about people having to move houses due to tax increases, what about the millions of Londoners who have had to leave their neighbourhoods due to their after tax salaries no longer being able to afford rising rents or mortgage/deposit demands?

Dinero said...

VAT is not just payed in the city, I was thinking of at the big political picture of the state being funded by the people working in the cities.

Thats a good point about a london Benefit if people do split up houses to get under the tax, it would mean more flats for young people.

However the point raised by the pictures in the article is a politically powerfull one. And there are better ones that the editor could have used here http://www.equestrianproperty4sale.com/

How can you explain to the voter that huge gaffs with acres of land occupied by people who are obviously not poor don't pay the tax and terraced houses in the smoke do.

Its called a mansion tax but its terraced houses in london that pay it but actual mansions DONT pay it.

mombers said...

@Dinero, yes it is a hard political sell. But the fact of the matter is that the enormous house in the middle of nowhere doesn't impose a burden on anyone - it's existence does not make my commute longer/require me to pay more for my house which is near my job and other amenities. In fact, the jobs and economic activity associated with its construction and maintenance are a net positive for the economy.
The general feeling is that taxes should only be paid on what you put into the economy, i.e. labour and capital, and not what you take out, the biggest of which is the state-created right to occupy prime spots of land exclusively. I guess the hope is that someday all of us can be idle landowners but this is of course a logical impossibility

Dinero said...


But its in this context, its under the LVT system that the inactive landowners DON'T pay tax.

Dinero said...

Come to think of it they may not be inactive at all, they could have a large salary but live in the countryside and so pay very little tax.

The Stigler said...


"How can you explain to the voter that huge gaffs with acres of land occupied by people who are obviously not poor don't pay the tax and terraced houses in the smoke do."

Because people with massive gaffs in the country are rarely rent-seekers nowadays.

The guy who has bought Wentworth Woodhouse might have bought a massive £1.5m gaff in the country, but the location is terrible. He's not going to get customers because of facilities created by the state, like hotels in Westminster do by virtue of being near parliament. So in that regard, he's a wealth creator, while hotels in Westminster are mostly rent-seekers.

Most people have no idea how much of the economy of London is people living off the state, but I can tell you that any time I get a call from a potential client in London, it's something to do with a museum or a fake charity or something outsourced for government. Not once have I had a call from an entrepreneur who makes their money selling things to people willingly paying for goods.

Dinero said...
This comment has been removed by the author.
Dinero said...

Hmmm I get your point but someone earning 200K in london and paying 100K in mortgage is not rich like someone living in a 1950K house mortgage free with 30 acres is. Have a look at the website that I linked to , it really does put it in a political perspective.


thethoughtgang said...

@ Dinero

Of course they're rich.. they're able to occupy one of the most valuable pieces of land on the planet. You're clinging to olden times ideas of wealth being all about how big your house is.. we're beyond that. It's all about *where* your house is.

Why do you think that the Oligarchs buy terraces in London instead of castles in Aberndeenshire?

And you can't take whether someone has a mortgage into account. If things were reversed and landed countrymen were mortgaged to the eyes whilst city types bought everything for cash, would your view change? How something is financed is not the issue.

Dinero said...

well with LVT they would not that is explicitly the issuue thst I am highlighting.

Mark Wadsworth said...

Din, "the tax is raised not from land it is raised from the productivity of those living in the city"

That sounds like a KLN. The rental value of urban land arise from the productivity of those living and working there, and LVT is a tax on rents. It is not a tax on productivity, it is a tax on rental values which would otherwise go to landowners (with owner-occupiers, the two categories overlap).

Din, again: "How can you explain to the voter that huge gaffs with acres of land occupied by people who are obviously not poor don't pay the tax and terraced houses in the smoke do?

It's called a mansion tax but its terraced houses in london that pay it"

the official name is not and never was "mansion tax" so that is irrelevant. If you called "tobacco duty" something else like "Rubber tyres duty" you can hardly argue that it's not a tax on rubber tyres.

And urban people and most voters are not paying rent and mortgage interest to country squires, they are paying to urban landowners and bankers.

Din, again: "they could have a large salary but live in the countryside and so pay very little tax." and "someone earning 200K in London and paying 100K in mortgage is not rich"

Those are more KLNs, good luck to them.

That's like saying tobacco duty is unfair because some millionaires don't smoke. Or income tax is unfair because people earning £200,000 aren't rich. Well, fact is they are. Or saying "If I buy goods on hire purchase, I shouldn't pay the VAT on them" what does the mortgage have to do with it?

That's why YPP recommends a 50/50 tax system, half is flat income tax and half is flat LVT. So yer £200,000 earner ends up a lot better off and on the facts, the country squire will end up paying more.

Mombers, Stigler, TTG, thanks for backup! Completely agreed, good examples etc.

Mark Wadsworth said...

Din: "with LVT they would not that is explicitly the issuue thst I am highlighting."

Look, any tax on the value of land and buildings falls on the value of the land.

What Labour have proposed is to extend the real life ATED (mansion tax lite for foreigners etc) to all homes.

But the government has already announced two new ATED bands, £0.5m - £1m and £1m to £2m.

So what it boils down to is five or six new Council Tax bands, making the whole taxation of homes system much fairer and a bit more progressive.

It's just a shame they can't man up and scrap Inheritance Tax and Stamp Duty Land Tax as a quid pro quo (these taxes are 'progressive' and primarily on land values, but otherwise they are very bad taxes and probably unfair, taken in isolation).

Kj said...

Even at the time when classical economists mulled over the whole land rent thing, location as a product of vicinity to other people's production/activity had probably surpassed "natural" land rents as in what extra wheat yield you can get from an acre. Ignoring minerals/energy ofcourse. Rural mansions simply don't matter. It's probably true that the image of landowners is still someehat about people owning a lot of land by area, or big houses, but the numbers on what people are willing to pay for location tells us that moors and pastures don't even register as slightly important. You can own an area the size of a borough if you put up the cash you would for a London semi, in Saskatchewan or Nebraska. Unsurprisingly very few do.

Mark Wadsworth said...

Kj, there was a man who actually did that - sold his London house and bought tens of thousands of acres of farmland in the USA.

Here's an example in Forbes.

$132 million gets you either 124,000 acres of Wyoming or one very grand house in central London!!!

Kj said...

There you go MW, good find. AFAIK, Wyoming is rather high priced, you could probably find an even more extreme example. That's 60% larger than Malta for reference's sake.

Kj said...

But probably not a lot of examples of someone actually doing just that...

Kj said...

Heck, you can get a bleedin´ 800 acre island with nine houses in Scotland for just under the proposed mansion tax treshold. What old widow wouldn´t want an island?

Mark Wadsworth said...

Kj, there was a real life actual example of one man doing it, it was in The Daily Mail, but I cannot remember where he bought his massive farm/ranch. Wyoming? Texas? Nebraska? Somewhere in the middle of nowhere, that's all I can remember.

Malta is small, but half a million people live there and it is lovely for tourism etc. The total value of all the land must be huge, tens of billions :-)

Mark Wadsworth said...

Kj, that is a great example.

The total value of land in London (one-tenth of the UK population, one per cent by area) is huge, it is a quarter of all UK land values.

It is much more than the smaller countries Scotland, Wales and Northern Ireland all together.

These three countries are one-tenth of the UK population, but spread over one-third of the area, so there are much less agglomeration benefits and land values are much lower.

Kj said...

MW: yup, and the grand rural properties (with grand homes) is essentially just buying yourself expenses that the subsidies and any income you might scrape in, will barely cover. There's probably capital gains in it, but that's like any farm property, everything is capitalized into the purchase price. Grand houses is just an additional folly most likely subsidised from other capital (or land) income.

Bayard said...

"800 acre island with nine houses in Scotland"

Pity Scotland isn't a bit warmer. Mind you, aren't the Summer Isles where The Wicker Man was set?

Steven_L said...

I can report that Aberdeenshire had this pick of the weather last winter.

All January and February I was driving to work in sunglasses, looking out at a calm flat sea, listening to tales of chaos and destruction down south on radio 4.

Ben Jamin' said...


"The total value of land in London (one-tenth of the UK population, one per cent by area) is huge, it is a quarter of all UK land values."

The value of land for London and the SE is about 60% of the UK total.

There was a report published in the Evening Standard a year or two back showing the break down of HP's per region. I think London and the SE were responsible for around 46% even back in 2012.

Given the disparity in site values, a 60% guestimate I think sounds conservative.

And that has probably risen over the last two years.


Mark Wadsworth said...

B, yes, heat or eat. That is why life expectancy in Scotland is so short, they all drop dead at 65. Oh, hang on…, if we cap fuel prices then something terrible will happen...

SL, I saw a TV programme a year or two ago, which featured Scottish farmers picking salads and vegetables in January - they were moaning about the bad weather and poor harvest.

BJ, yes, L & SE is 50% or 60% of the total, chuck in SW and East Anglia and it's easily two -thirds. So why isn't the rest of the country rooting for Mansion Tax at the very least?

Physiocrat said...

I am going to get my mansion below the threshold by converting the west wing into stables and investing in some horses.

Steven_L said...

Scots farmers moaning? Are you sure?

Ben Jamin' said...

@ Phys

But the stable is still part of the selling price.

If your are talking about talking about deliberately reducing the value of your home to get under the threshold, the "Boris Johnson KLN", that's easily de-bunked.

Let say you own a £2.5M property in London, and you want to avoid the £5000 per year charge.

Improved value=say £750,000

In order to avoid Mansion Tax you would have to destroy 66% of your bricks and mortar value.

Not going to happen to save £5000 a year.

It's even questionable that merely dividing a home would work. Aside from the financial aspect, this loop-hole is easily closed. You could just say any properties that share a party wall, and are owned by the same family are treated as one entity for the purposes of valuation.

Ben Jamin' said...


"Seeing as the MT starts at a modest £14,000 a year for a £2 million home"

How did you work that out????

MT for a £2M home = zero

Physiocrat said...

My mansion in in rural Northumberland. It was originally built in the early nineteenth century for a Tyneside industrialist and designed in the Classical style by a well-known Newcastle architect, and has extensive landscaped grounds. The building alone has a fire insurance value of more than I could sell it for.

Mark Wadsworth said...

BJ, Ed Balls hinted that he would extend the ATED charge, which currently only applies to "foreign tax dodgers", to all homes.

The ATED charge in the £2 to £5 million band was £14,000 but has gone up to £15,400.

Hwfa Morgan said...

P, no need to go to all that trouble. Just tell the valuers that the whole building needs a new roof and that should do the trick. Unless, of course, you've just spent a small fortune getting the roof done...