Both the Labour Party and the Liberal Democrats will go into the May 2015 general election on the basis that, if elected, they will introduce a Mansion Tax. David Cameron has ruled this out - but unless the Conservative Party wins an overall majority it is likely that some form of the policy will be introduced in the next few years.
The Labour Party's version of the Mansion Tax will see UK properties that are currently worth more than £2million being subject to an annual charge of at least £3,000. The starting threshold would rise as house prices rise, with the intended result being that the number of properties subject to the charge would not increase.
The figure of £3,000 would apply to properties worth between £2million and £3million. There would be higher bands giving rise to larger (and as yet undisclosed) annual liabilities. It has been suggested that overseas owners of UK properties could be subject to higher charges than UK resident owners.
In an attempt to counter accusations that the charge is unfair towards those whose income levels are not in proportion to the value of their property, the Labour Party is suggesting that owners who do not pay income tax at either the higher or additional rates of tax will be able to defer the charge until the property changes hands (which may, of course, be on death).
The Liberal Democrats are thinking along similar lines, although they have previously suggested the charge should be one per cent of the property's value above £2m, and they have suggested that it should be "pensioners" who could delay paying until the property changes hands. The Party has also suggested the charge could be incorporated into the Council Tax system, which appears to contrast with the Labour Party's proposed approach.
The current proposals have been drawn up so as to make the policy appear as straightforward and as reasonable as possible, but a number of likely problems have been identified.
Firstly, the policy would depress prices at the top of the housing market (and there is some evidence that talk of the policy is already doing so). With well over 80 per cent of the properties that are likely to be affected being in London and the South East, the effect on the market will be most keenly felt in this area of the country.
The Labour Party has suggested the policy would generate £1.2billion a year. Estimates by estate agents as to the number of properties that would be affected by a Mansion Tax range from 58,500 to 110,000. If properties worth between £2million and £3million are only going to be subject to a charge of £3,000, then for the Labour Party's numbers to work the charge would have to be significantly higher for the more expensive properties. This, of necessity, would exacerbate the cliff-edges that are inherent in a "banding system", and means the policy would have a particularly distortionary impact on house prices around each of the various thresholds.
The possibility of rolling up the charge could generate massive potential liabilities in respect of certain properties, discouraging homeowners from moving and thus keeping larger properties off the market.
The policy has also been criticised for not taking account of mortgages. Thus, someone with a property worth £2.1million and with a £1.9million mortgage would be subject to the charge, whilst someone with a property worth £1.9million without a mortgage would not.
If a Mansion Tax is introduced, it is unlikely to be exactly as currently proposed. Attempts will probably have been made to avoid some of the problems discussed. But this tax is going to have a significant effect on the owners of the targeted properties and on the housing market in general. The market is still adapting to the recent changes that discourage the holding of residential properties through companies. The Mansion Tax may well be another unwelcome challenge to a fragile market.