Bad manors

But after the headlines come the questions. What is a ‘mansion’, anyway? It is a word that belongs in PG Wodehouse’s world of millionaire layabouts getting accidentally betrothed in huge country estates. The word ‘mansion’ belongs in the same class as words like ‘valet’: something that only the super-rich will possess, and thus a legitimate target for a tax grab. It also carries the slightest whiff of decadence.

So we are taxing the privileged and/or the wicked to pay for nurses? Not quite.

Property experts Knight Frank estimate that over three-quarters of today’s £2m London homes are flats or terraced houses. Ten per cent are one-bedroom flats or even studios. Some of them were worth nowhere near £2m when purchased – decades ago – by owners who have certainly never employed a valet. But if the ‘mansion tax’ is not really about mansions, then what exactly are we taxing? There are three possibilities, all interlinked.

The first is that the mansion tax is a retrospective levy on London property price inflation. The capital will carry most of the fiscal burden, generating as much as £1bn of the projected £1.2bn, according to Zoopla. We forget too easily what an extraordinary boom has taken place in the last 40 years. Figures from Nationwide show a typical London home costing just under £10,000 in 1977. What is that figure today? £400,000? £500,000? It depends on who you ask, and in the current market it rises every month.

The second real target of the mansion tax is foreign non-residents. Figures are hard to come by on this shadowy, cash-based world, but it is generally accepted that overseas owners have bought heavily in London and added to the wider inflation problem. Westminster and Kensington & Chelsea together boast nearly half of all properties over £2m; they also lead the way in Russian and Middle Eastern ownership. A charge on owned property might be harder to dodge than the residency requirements for income tax; even Tory MP Mark Field has lent tentative support to a mansion tax applied only to non-residents.

Politics

Thirdly, we come back to politics: the mansion tax is aimed at ‘unearned wealth’. Is it right that an individual’s net worth should rise by more than the annual minimum wage each month simply because he owns a building in a certain part of the country? The traditional Left demands, on principle, that such gains be taxed.

But there would be fewer supporters of the ‘inflation, overseas buyers and unearned wealth tax’, so ‘mansion tax’ it will have to be.

Tax collection in Britain has traditionally focused on cashflow: when we receive a salary we pay income tax; when we sell an asset for profit we pay capital gains tax; when we transfer wealth down the generations we pay inheritance tax; when we buy something we pay VAT. Let us not forget that purchases of the very largest homes are already subject to a 7 per cent top rate of stamp duty land tax. Taxing pure ownership would be out of kilter with the rest of the tax system.

The closest example of an ownership tax today is vehicle tax, which is punitively expensive for the largest or most powerful cars. But this ‘Porsche tax’ at least has an environmental objective (to make it less attractive to run fuel-inefficient cars) which can, at a push, be separated from the merely political. It is far less clear what purpose is served by a mansion tax beyond the redistribution of wealth.

The concern is that if a mansion tax as proposed by Labour does become law, it will normalise the idea that the state can tax the population not for what it buys, sells, earns, or gives away, but for what it owns. That is a real departure from tax as we understand it in Britain today, and it could set a precedent.

So one risk of mansion tax is a widening of the scope of asset taxes in general. If ostentatious houses can be taxed for the NHS, then why cannot Rolex watches be taxed for education? An annual property census sounds dystopian and intrusive, but it would not be too much of a stretch in our data-driven society. Fiscal drag is another risk: if the £2m threshold is left static, or increased too slowly, then thousands of people each year will suddenly find themselves paying to be classed as mansion dwellers.

The politics of the proposal may be reasonably clear, but the practicalities are not. There are two likely ways for a mansion tax to be collected.

The first – favoured by the Liberal Democrats – is through additional council tax bands. This would base the value of the home on a notional April 1991 figure, that date being the last time the bands were reviewed. Nick Clegg was asked on LBC Radio (6 October) what this would mean for pensioners who are asset-rich but cash-poor. His answer, that back taxes would be taken from the estate on death, has troubling implications for those who may inherit a home. The mansion tax in this format could ultimately fall on sons and daughters with lifestyles far from super-rich.

The other collection method – Labour’s likely choice – is through self-assessment. The taxpayer would state the value of his house on his tax return and pay a levy on anything over the threshold. But who will put a pricetag on the property? If homeowners are expected to commission a formal valuation from a recognised professional then that will not be cheap. On the other hand, if values are to be declared by the taxpayer then who will police the obvious opportunity for tax-evasion that this presents?

Neither system inspires confidence, and both risk costing more to administer and govern than they would collect in receipts.

Palaces

One thing was made clear in the aftermath of Mr Miliband’s speech: nobody will escape the mansion tax. Shadow chancellor Ed Balls took pains to point out that Balmoral, Sandringham and other royal residences would not be exempt, saying: “There aren’t different rules for anybody – it’s the nature of our society.”

But the Queen already pays taxes, including council tax, and Ed Balls must know this. Behind this remark about the “nature of our society” we can see the true motivation behind Miliband’s mansion tax announcement.

It is a policy designed to raise political capital more than to raise doctor-funding hard currency. It is an easily-understood tax idea that will be used to characterise Labour’s core values as we enter a general election year.

The mansion tax risks hitting pensioners whose only crime is to have lived in the same house all their lives; its collection and administration reek of intrusive data-gathering; and it represents a fundamental shift in how and why people are taxed in the UK. It is a powerful soundbite, but a flawed, impractical and unfair policy.

Rick Eling is head of investment solutions of Sanlam

Key points

* If Labour wins the 2015 election, British dwellings worth over £2m could be hit by a new mansion tax.

* Tax collection in Britain has traditionally focused on cashflow.

* The mansion tax risks hitting pensioners whose only crime is to have lived in the same house all their lives.