Listen to this article
Wealthy homeowners will try to avoid paying any new mansion tax by splitting up their property or minimising its valuation, experts have predicted.
They have also warned of a wave of litigation as many owners argue with the authorities about the value of their home if a Labour or Liberal Democrat government introduces the tax.
At the same time, properties just above the £2m threshold could fall in value as their owners would have to pay a £3,000 annual levy, while wealthy investors could even be deterred from coming to London, say critics.
Labour insists the policy is a fair way to raise money during a time of austerity to maintain crucial public services, with the proceeds earmarked for the National Health Service.
But some critics warn that in parts of London a £2m home may be a flat or modest family residence rather than a mansion.
Agents are already reporting a chilling effect in some postcodes. The prospect of a mansion tax was acting like “the black death” on the top end of London’s housing market, according to Trevor Abrahmsohn, managing director of Glentree estate agents.
Lord Mandelson dismissed the policy this week as “crude”. The architect of New Labour prefers the Lib Dem version, which is similar but levied through new council tax bands rather than through central government.
Yet hundreds of Labour MPs with seats in less affluent areas are more enthusiastic about the tax, which would barely apply to their constituents.
As politicians clashed over the policy, estate agents say clients are already looking at splitting their homes up in an attempt to create two or more smaller properties.
“Our valuation offices have had inquiries about how to go about it,” says Ed Mead, a director of Douglas & Gordon. “People are asking what a granny flat would be worth, or whether they can convert their house on to two different leaseholds.”
Dodging the tax would be “very easy to do”, Mr Mead says. Using the example of a £4m Chelsea townhouse, he suggests it could be converted into a £2.5m maisonette and a £850,000 basement flat. “You can then register two separate leases and grant yourself long leaseholds,” he says. “People are trying to diminish the value of their property; it’s crazy.”
Mr Abrahmsohn says people are already splitting property titles, opening a supposed bed-and-breakfast, setting up a business centre or conference room: “Anything to create confusion around a building’s status as a residential home.”
He predicts “an avalanche of court cases and tribunals” as wealthy homeowners challenge HM Revenue & Customs’s valuation of their homes.
But Labour’s leaders are confident the policy will be workable. Owners could divide up their properties but unless they sold or gave away the new flat, any subsequent rise in its value could leave it liable to capital gains tax. Labour also points out that they would have to pay two lots of council tax.
Homeowners might decide to put parts of their property into the names of different members of their family but they would need to create separate apartments.
The Revenue takes the view that if there is internal access between two flats they should be treated as one dwelling.
George Bull, partner of Baker Tilly, professional services firm, warns against “sham” arrangements, saying the Revenue would challenge any set-up that lacked substance or was aimed at avoiding the tax. “If it [the mansion tax] comes on to the statute book, it will be laden with anti-avoidance provisions.”
Property owners may instead attempt to minimise the value of their property, for example by putting home improvements on hold.
People whose properties lie in the middle of bands will be able to declare its value without a valuation, under proposals put forward by shadow chancellor Ed Balls in October.
But in other cases, homeowners will be able to produce their own valuations. Given the incentive to shop around for low valuations, that is likely to result in a clustering of values just below the threshold.
Property taxes are generally viewed as some of the hardest taxes to avoid, prompting the Paris-based OECD to cite the “advantages of drawing on an immovable tax base in a period of globalisation”.
Champions of the mansion tax may draw encouragement from the annual tax on high-value residential properties that are owned through a company, which has raised more than expected since it was announced in the 2012 Budget.
Labour promises that it will allow “asset-rich, cash-poor” individuals — for example widows or pensioners — to defer the payment.
That means the party would have to charge people in homes above £3m even more to get to its £1.2bn target of annual income: an average of more than £20,000 each.
Wealthy face fresh ‘daylight robbery’
Experts often point to property taxes as one of the easiest ways to raise money: buildings are difficult to hide, unlike income or savings, write Jim Pickard and Kate Allen. The Tories are opposed to the mansion tax but they have been happy to increase their tax take from wealthy homes since 2010: for example by lifting stamp duty.
But history does not suggest that taxing real estate is always a smooth process. Trevor Abrahmsohn, managing director of estate agents Glentree, says the proposals for a mansion tax are reminiscent of the windows tax from three centuries ago.
The notorious levy was based on the number of windows in a house and was raised in France, Scotland and England in the 18th and 19th century.
William III first brought in the unpopular revenue generator in 1696.
Like Labour’s proposed mansion tax, which would kick in on homes worth more than £2m, the window tax was also “progressive”, with a much higher charge on properties with more than 10 windows. And just as Ed Balls, shadow chancellor, has offered exemptions for the “asset-rich, cash-poor”, his predecessors excluded those who could successfully plead poverty.
William III hoped his windows tax would avoid the controversy surrounding the idea of an income tax, which was seen as an unacceptable intrusion into private affairs. His creation was levied on occupants rather than owners — unless the building was vacant.
Yet it was despised as a “tax on light and air” and led to the expression “daylight robbery”. The Scots resented William Pitt the Younger when he introduced it north of the border in 1784.
Many homeowners simply bricked up their windows to avoid the tax: many of those walled-in spaces can still be seen today. However, the tax remained for 156 years and was not repealed until 1851, soon after the introduction of the first permanent British income tax.