Natalie Elphicke is a non-executive director of a leading building society and a published policy writer on housing and housing finance with Policy Exchange and the Centre for Policy Studies. She is co-founder and Chairman of Million Homes, Million Lives.
Unlike death and taxes, there are few certainties about property, especially when it comes to paying taxes on them. A mansion tax proposal has more holes than a sieve. It doesn’t raise money, it loses it – for everyone, and would damage aspiration, home ownership, and personal wealth. It would be seen as an attack on the property industry, damaging construction, jobs and money.
Over breakfast, just thinking through the likely course of implementation of a mansion tax came this. Some classic avoidance, exception and arbitrage techniques which might come to bear in the fictional world of Ed Miliband’s Labour government. Bricks & mortar may be static, ownership, division of wealth and occupation in a home are not:
(a) it is May 2015, Labour win the General Election with a commitment to introduce a new tax on ‘Mansions’ to pay for spending on the NHS;
(b) Labour realise the National Trust owns more ultra expensive property than anyone, probably even the Queen – Exception: exclude the mansion tax from all charities. Avoidance: there are a rash of new property owning charities;
(c) Labour realise that they have forgotten to exclude the Queen: Exception: exclude the Queen. Phew, but what about ‘grace and favour’ exclusive apartments? What about the rest of the Royals? The line should be drawn at Prince William or Princesses Eugenie and Beatrice?
(d) Labour realise that most of the Royals don’t own their own homes anyway: Crown Estate isn’t a charity: Exception: exclude the Crown Estate;
(e) Labour realise that they have difficulty excluding the Crown Estate without excluding the other landed estates of the Gentry – Exception: exclude Grosvenor (Belgravia, Mayfair), Cadogan (Chelsea, Knightsbridge) and Howard de Walden (Marylebone) or Exception: no tax payable for landed estates if residential properties are held for investment – Avoidance: an explosion in real estate investment trusts, and the like;
(f) In implementing (e) there is a crack down on simple property owning trusts – where a home is held on trust and rented on an arms length basis. This has been a common technique for family trusts, particularly for inheritance tax planning. Unintended Consequence: lots of middle income families find themselves with additional punitive anti-trust taxes on homes that were never going to be worth £2 million;
(g) Labour realise that lots of unexpected people have property based business, such as hotel and conference centres, which may be over the threshold- exception#: Mansion Tax not to apply to any ‘mixed business’ – Avoidance: put a conference room in your front room; or become a B&B: business taxes will be cheaper than residential ones and you may be able to offset your business losses against other income;
(h) Following (g) Labour realise that there are an awful lot of home-businesses: anti-avoidance: define what is a business in the home and by doing so act against the tourist industry (particularly in more rural areas) and small/ start up business, again punitive business tax increases on home-based businesses;
(i) Following (b) Labour realise that charity tax avoidance is going on and move to close the loophole through anti avoidance: but how do they do this when, for example, most of the housing associations are charities and are huge landlords – what valuation should be applied to rented property – should it be rental based, investment based or on open market sale? Unintended Consequence: Labour are required to re-consider when renting is charitable, and when it is not – a thorny issue;
(j) valuation- a whole topic in itself. For keeping property below the threshold (Avoidance) one could expect an increase in conversions and sub-divisions of property. Some of those will be family settlements – property holding of different parts of a property between family members, or different homes on a single plot of land: Unintended Consequence: how do you distinguish valid intergenerational family separation, for example of working farmhouses? Or building an extra home for your grown up children in the garden?;
(k) what about dividing up housing wealth? People may sell a super expensive property and divide their wealth across two homes instead. Unintended Consequence: more second homes in areas which are already suffering from too many, less homes for local people, less affordable housing. Unintended Consequence: people sell their expensive home and can pay more for a less expensive one: housing costs go up and homes become less affordable; Unintended Consequence: concerns about the mansion tax may mean the end of the ‘bank of mum & dad’ – ‘mum & dad’ may need to keep all their housing wealth to keep a roof over their own head;
(l) It is then a hop, skip and a jump from thinking that a division of housing assets is common sense, to trying to tax people who have more than one home. Unintended Consequence: this would lead to tax on aggregate housing wealth – all property ownership;
(m) And back to valuation – this is a tax which could be implemented gradually – as a super tax on properties changing hands based on actual price paid. That could have a short term effect of dampening higher demand housing or the Unintended Consequence of more high end properties falling into the hands of foreign states and owners with off shore trusts. The Government has already introduced an offshore property vehicle tax for this type of avoidance: Labour would have to make the level of this tax more punitive than the proposed mansion tax.
(n) The implementation of a mansion tax could see two likely creative solutions (at least, it is only breakfast time): the creation of a housing inflation arbitrage, where you trade the inflationary increase in your homes – this would have to be convertible to an actual interest in property (like options convertible into shares) to keep out of Anti Avoidance. This market could be used on a more widespread basis, and would be likely to need new Regulation and Consumer Protection and perhaps Anti Avoidance. There could be Unintended Consequences on equity share, rent and buy, staircasing, equity release, shared ownership, long leasehold, and established mechanisms for dividing property use and property wealth.
(o) The other creative solution would be sharks who would arrange part purchase and low purchase arrangements for older people, who are a significant number of the domestic high end market, and agree to pay their mansion tax. Like some of the worst equity release schemes or conversion of ‘owning into renting’ schemes which have been seen. That would require, assuming Labour cared enough about a rich granny being ripped off as a poorer one, significant new Regulation and Consumer Protection;
So far, that is an awfully busy Labour parliament, for £2billion. To put that in context, this raises less than a 1 per cent increase in income tax – so that tells you that this tax is probably not really about raising £2billion. It is not about significant new funding for the NHS – the NHS budget exceeds £108billion already.
In order to implement the mansion tax there will likely be a whole new valuation of all property required. That is the most likely impact of this policy – the national revaluation exercise in order to re-band council and national taxes which Labour were forced to abandon in 2010.
The outcome: we could all pay more income based taxes on property on an annual basis – whether or not people are earning the income to pay for them. At the moment we primarily tax property as a capital asset: on transfer of ownership, on death, when realised for care home and other costs. To tax a capital asset on an income basis is to further tax the accumulation of individual wealth during a lifetime.
Labour’s Mansion Tax could end up as 500 pages of legislation that would not just consume large amounts of Government energy better spent elsewhere, it would fail to raise the amount expected because of mass avoidance and creative financial instruments. This tax would be deeply harmful to the property industry, to construction, to jobs, money and economic growth. Far from hurting rich people, it would harm everyone.