How the mansion tax could affect you

The proposed ‘mansion tax’ could cost you upwards of £24,000 a year. You don’t have to actually own a mansion to be hit by the mansion tax proposals, especially if you live in London and the South East. Find out how you could be affected.

mansiontax

In the US, they have the Tea Party. The ‘Tea’ stands for ‘taxed enough already’ – and you may sympathise.

We don’t have a Tea Party in the UK, but you could be tempted to form one of your own after you hear about the true impact of the mansion tax proposals.

New tax, new danger

Firstly, this is a badly-named tax. That’s because you don’t have to own a mansion to pay it. In parts of London, a two-bedroom flat will be more than enough. Or even a one-bedroom flat.

It is a very political tax, dreamed up to win headlines and votes, rather than a serious attempt to fill the gaping hole in the public finances.

It was the Lib Dems who came up with the idea in 2009, with business secretary Vince Cable an enthusiastic backer.

As it stands, the mansion tax will be a 1 per cent annual levy on all residential property, both first and second homes, valued at more than £2 million. The Lib Dems claim it will raise £1.7 billion a year.

Shadow Chancellor Ed Balls has subsequently said he will use the mansion tax to fund tax cuts.

Not just for millionaires

Even if you think your home – or second home – is worth well under £2 million, you should still be worried. Since mansion tax proposals were first mooted, rising property values have nudged more and more properties over that threshold.

It’s unlikely that politicians will raise the barrier in line with house price inflation. Global property consultancy Knight Frank notes that over the past 10 years have prices have risen by 69 per cent.

Assuming a similar rate of growth in future, all houses worth more than £1.2 million today would be paying a mansion tax 10 years from now, tripling the number of homes covered from 55,000 to 157,300.

If that trend continues, it reckons 775,000 houses could be ultimately affected.

The future is hard to predict, but one thing is certain. As with every new tax, more and more people are likely to be dragged into the net.

Within 25 years, all properties worth more than £554,000 today could be classified as mansions, and taxed accordingly.

A tax bill of £24,000 every year

Those affected by the proposed mansion tax will face a substantial annual bill. The average property hit by the tax will currently have to stump £23,595 a year. That’s on top of income tax, National Insurance, VAT, stamp duty, council tax, inheritance tax…

And you will have to keep paying it, year after year, even after you stop working and your income falls.

It doesn’t even take account of the size of your mortgage, which is hardly fair on people who have borrowed large sums of money to buy their dream home.

More than 85 per cent of all properties hit by the tax will be in London and the South East. Many of the owners will be cash-rich enough to pay it, many won’t.

Further considerations

If your house is worth just over £2 million, you are likely to see its market value plummet to below the new mansion tax threshold.

There has even been talk of charging a super-mansion tax for properties worth £4 million.

The mansion tax may be a passing political fad. But if you’re planning your next house move, you should speak to an independent financial adviser to assess its likely impact on you.

Things to think about:

  • Research suggests that more than 85 per cent of all £2 million plus properties are located in London and the South East.
  • With a £2 million threshold, nearly one in 10 properties defined as mansions for the tax would be one and two bedroom flats.
  • If the £2 million threshold were not increased in line with house price inflation, over the next 25 years a total of 775,500 properties could be dragged into the mansion tax net, including all properties with a current value of £554,000 or more.

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About the author

Alan Smith is the CEO of Capital Asset Management. His specialisms include: wealth management, strategic financial planning and creative tax planning.

Please note: The opinions, beliefs and viewpoints expressed by our contributing authors do not necessarily reflect the opinions, beliefs and viewpoints of unbiased.co.uk.