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Taxing Mansions: the Taxation of High Value

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Taxing Mansions: the Taxation of High Value Pointmaker TAXING MANSIONS THE TAXATION OF HIGH VALUE RESIDENTIAL PROPERTY LUCIAN COOK SUMMARY Recent proposals for a “Mansion Tax” claim The UK already has by far the highest that it would be a precisely targeted and property tax take of all OECD countries (at efficient tax that would be paid only by the 4.2% of GDP compared to an average of 1.8%). very wealthy, and that high value residential High value residential properties already property makes an unfairly modest make a high tax contribution: contribution to tax receipts. These claims are their Council Tax bills are twice the flawed. national average. A Mansion Tax is a tax that would not take the highest 1.6% of sales yielded £1.2 account of the individual’s ability to pay that billion in stamp duty in 2010. This is tax. It would unfairly penalise those on low equivalent to 26% of all residential stamp incomes living in certain parts of Britain where duty. The new upper 5% Stamp Duty property happened to have substantially band will have add around £290 million a increased in value during the recent property year. Tightening up evasion would add boom or, in the case of elderly owners, during another £150 million or so a year their period of ownership. (assuming one in 10 transactions over £1 It would be very complex to administer and million avoid stamp duty). collect. Accurate valuations of high value the top 0.7% of housing stock held at individual properties (which are by definition death contributes 36% of inheritance illiquid) are difficult to establish as: tax receipts from residential property. there is little comparable transactional It is likely that a Mansion Tax would raise, at evidence; most, £1 billion – the equivalent of 0.2% of an individual property’s value is total tax revenues. But the damage it could determined by the interaction of many do could be far greater, particularly if it different, often intangible, attributes. undermined the UK’s attraction to there would also be a high likelihood of international entrepreneurs and investors. legal dispute and calls for revaluation. 1 INTRODUCTION Treasury believes is particularly open to In the 2011 budget George Osborne stated that abuse.”2 the Government would look at tax on very high value properties, following scrutiny of the The superficial attractions of a Manson Tax taxation of high value residential property by At first sight, it does appear that the proposed both their Coalition partners and the media. Mansion Tax has some attractions. Advocates claim that: Proposals for a so called ‘mansion tax’ were first made by Vince Cable at the 2009 Liberal it would be precisely targeted at the very Democrat conference. At that time the Liberal wealthy; Democrats proposed an annual levy equivalent such a tax would offer less room for tax to 0.5% of a residential property’s value to the avoidance than other forms of taxation; extent that it exceeded £1m. It was estimated that such a tax would be levied on 250,000 tax it would raise significant sums for the payers and generate receipts of £1.1 billion. Treasury at a time when the nation’s finances are in very poor condition; By November 2009, the Liberal Democrats amended that proposal, instead suggesting a tax high value residential property makes an of 1% on the value above £2m. It was estimated unfairly modest contribution to taxation that this would affect a reduced number of receipts. taxpayers, to perhaps 70,000 to 80,000. This proposal was subsequently included within the A PROFILE OF HIGH VALUE 2010 Liberal Democrat Party manifesto. RESIDENTIAL HOUSING There are no definitive statistics available for the Since the formation of the Conservative-LibDem number of residential properties in the UK coalition there have been no formal proposals whose value exceeds £1 million or £2 million. for a mansion tax, though various alternatives The last comprehensive valuation of the UK’s have been discussed. In January 2012, both the housing stock was undertaken for council tax Business Secretary and the Deputy Prime purposes in 1993. Even then, the valuation Minister called for an annual tax of 1% of a exercise was undertaken to place properties property’s value above a £2 million threshold.1 into value bands, rather than to provide a precise valuation on a property-by-property Though technically a separate issue, there has basis. also been political focus on stamp duty on high value properties. Since the introduction of a 5% There are however, various sources of rate of tax for sales over £1 million from 6 April information regarding the number of sales of 2011, there has been some scrutiny of the houses at or above these price thresholds. avoidance of payment of the tax. It has been HMRC Transactions Data reported that the Chancellor “will use his HMRC data indicate that over the four years Budget to curb evasion and avoidance of taxes from 2007 to 2010: on very high value properties, an area which the 1 Our calculations suggest that this would also raise about £1 billion (assuming no evasion or avoidance). 2 Financial Times, 4 January 2011. 2 0.8% of residential property sales were at However, it is useful in showing the prices between £1 million and £2 million, geographical distribution of transactions. In accounting for 5.0% of the total value of particular, sales of both £1 million plus and £2 property sold. million plus properties are heavily skewed to London and the South East. These two regions A further 0.3% of residential property accounted for 81% of sales of £1 million plus transactions were at prices over £2 million, property in England and Wales in the period accounting for 6.5% of total sale proceeds. from 2007 to 2010; and 91% of £2 million plus properties. Therefore the top 1.2% of properties (all those above £1 million) accounted for 11.4% of total Distribution of £1m and £2m plus sales by sales proceeds. Region (England and Wales) Region Over £1m Over £2m There are roughly 22 million owner-occupied London 57.2% 71.5% and privately rented houses and flats in the UK. South East 24.7% 19.2% East of England 7.3% 3.5% Assuming that sales in these four years were South West 4.5% 3.1% roughly representative of the value of total North West 2.5% 1.7% housing stock, this would indicate that there West Midlands 1.3% 0.4% Yorkshire and The Humber 1.1% 0.4% are in the order of 255,000 residential East Midlands 0.9% 0.3% properties with a value of over £1 million; and North East 0.4% 0.1% Wales 0.2% 0.0% about 74,000 properties with a value in excess 100% 100% of £2 million. Source: Land Registry Land Registry Data Sales data is also available for England and Further analysis shows the extent to which any Wales from the Land Registry, though it is property-based wealth tax would hit particular known to undercount transactions, particularly housing markets within London and the South at the top end of the housing market. East. Properties within Kensington and Chelsea and the City of Westminster account for 1 in 5 of NUMBER OF SALES AND SALES VALUES OF UK DOMESTIC PROPERTY, 2007 – 2011 Lower Price Transactions (thousands) Value (£ million) Limit 2007 2008 2009 2010 2007 2008 2009 2010 40,000 120 88 82 78 7,172 5,259 4,935 4,701 75,001 146 94 90 83 13,043 8,364 7,987 7,368 100,001 197 116 101 103 22,727 13,421 11,610 11,899 125,001 188 103 115 92 26,234 14,416 16,022 12,815 150,001 185 100 118 92 30,187 16,394 19,532 15,138 175,001 160 79 65 78 30,170 14,867 12,243 14,755 200,001 254 133 119 136 58,198 30,507 27,222 31,310 250,001 104 51 45 55 29,059 14,222 12,535 15,409 300,001 185 94 86 112 70,325 35,947 32,849 42,981 500,001 58 31 29 41 39,593 21,423 19,585 28,148 1,000,001 12 7 6 10 16,310 9,759 8,652 13,239 2,000,001 4 3 3 4 17,990 14,794 11,963 17,201 Total 1,613 899 859 884 361,010 199,373 185,135 214,964 Source: HMRC Table 16.1 3 the £1 million plus sales in England and Wales; This suggests that applying an arbitrary and just 10 London boroughs and neighbouring threshold for a mansion tax would result in counties account for 60% of this market. taxing many family homes, albeit very heavily concentrated in affluent parts of the country. Such locations would bear a disproportionate burden of any property based wealth tax given Ownership Profile the distribution of value. Evidence from Savills’ own research, which includes information on the motivation of 10 Counties and London Boroughs with the buyers and sellers, provides some insight into highest number of £1m plus sales (as a % of £1 how this applies to high value housing stock. million plus sales in 2007 – 2010) The following analysis is based on five years of 2007 - 2011 deal book information covering the period Kensington and Chelsea 12.1% from 2007 to 2011 inclusive. City of Westminster 10.1% Surrey 10.0% Outside of central London the great majority of Wandsworth 4.5% properties sold for in excess of £1 million have Richmond upon Thames 4.3% been occupied by their sellers as their main Camden 4.3% residence, the proportion varying from 76% in Hammersmith and Fulham 4.2% the case of London’s suburbs to 85% within the Hertfordshire 4.1% commuter zone.
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