Last updated: March 10, 2012 12:26 am

Mansion tax and other easy targets

Non-dom/non-res buyers are perceived to be driving up property prices and not paying their fair share of taxes

As the UK Budget approaches, talk of a possible “mansion tax” is getting louder – and not just in Labour and Liberal Democrat circles.

The issue is part economics – how, in the words of Louis XIV’s minister Colbert, “to extract the maximum feathers from the goose with the minimum of hissing” – and part politics: how to make the perceived architects of our current economic mess pay more tax. Of course, plucking the golden goose may look tempting but you don’t want to kill it in the process. So what might be the options – and how do other countries manage?

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In the UK the easy victim, with few friends in political circles, is the non-dom and even more so the non-dom/non-res. They are perceived to be driving up property prices for “hard-working ordinary people” and not paying their fair share of taxes. While they pay indirect taxes – value added tax (VAT) – along with everyone else, they are out of the net for just about everything else except council tax and an annual flat income tax after six years in the case of the non-dom. Both are also exempt from capital gains tax whether or not the house is a primary residence. Separating the non-dom/non-res from the resident taxpayer who is already smarting under the 50p higher rate would make political sense.

The fact remains that property is a tempting target because, unlike people, it doesn’t move. It is also high value, and a small percentage yields a large sum. It is already highly taxed at the transaction stage, where stamp duty is levied at 5 per cent at the higher values, though this is countered by local taxes in the UK that are ridiculously low, with the highest council tax band in Kensington and Chelsea at £2,158. Many overseas buyers in London assume that this is £2,158 per month rather than per annum.

Non-res and non-dom buyers are used to some form of wealth or property tax in many popular international destinations, so they won’t necessarily be too put off by the same in the UK. France already imposes an annual levy of 0.25 per cent on any property valued at more than €1.3m and 0.5 per cent over €3m. This is applicable to all property no matter what the residency status of the owner.

In practice, this can be avoided as the tax is charged on the equity, not the debt, in the property. Not surprisingly, most high-value houses are leveraged just high enough to pull the equity out of the net. You can also split the family ownership: many a French château is owned in equal shares that are individually below the €1.3m threshold so, overall, it is unlikely that this tax raises meaningful revenue – but it does pay lip service to égalité.

The Italians are introducing a different spin on the concept of a wealth tax. They are charging their residents 0.76 per cent on the value of any property that they own overseas, dated from 2011. This has caused something of a stir and estate agents in Chelsea are remarking on the unseasonal footfall of Gucci loafers through their doors this year. In the US, there is no wealth tax to contend with apart from capital gains at a state and federal level – plus much higher local taxes.

The lesson for the Treasury is that the devil is in the detail with any mansion or wealth tax. If the aim is to satisfy public opinion without driving away individuals and businesses who pay VAT then that is possible by leaving the right loopholes in place.

It is also a tax that, if applied crudely on value alone, could have many unintended consequences. If property prices fall and turnover dries up as a consequence, stamp duty receipts would fall as would the indirect taxes, and employment, that mushrooms alongside building projects.

Then there is that “little old lady” living on fresh air in the house that she has owned all her life and which she never dreamt would have the sort of value it has now. How would any chancellor deal with that bit of bad PR? Also, core Conservative voters feel they have paid income tax and VAT on the money that went into their house, paid stamp duty on the way in and that they will pay inheritance tax at the end. Any more tax would face a serious political challenge.

However, it is obvious that the Conservative, if not the Lib Dem, element of the coalition would like to be rid of the 50 per cent higher rate tax, which they see as a tax on workers, albeit highly paid ones. With the addition of national insurance contributions, the highest rate taxpayer only takes home 34.2p for every £1 the employer is paying. Perhaps some form of mansion tax, with loopholes that exempt the “little old lady” and those already paying direct taxes in the UK, or the addition of two higher bands to the council tax might be the smokescreen behind which a retreat from the 50 per cent band is conducted.

Charlie Ellingworth is a founder and director of Property Vision

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