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High-Value Property Taxation

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The present forecast for the high-value property market is that it is set to slow down in the run up to next year’s election. The Labour and Liberal Democrats proposals, for an annual tax on properties over £2 million (the so-called ‘Mansion Tax’), have been an exacerbating factor.

The proposals for a Mansion Tax follow two other taxes on high-value property, introduced by the Treasury in the last two years. In April 2013 an Annual Tax on Enveloped Dwellings (ATED) was introduced. This annual tax is payable by companies on high value residential property. Taxes are therefore already being paid on company-owned properties worth over £2 million. The Coalition government also introduced a new 7% Stamp Duty charge on properties over £2 million.

There has been significant speculation as to what a Mansion Tax would entail. This article will consider the form such a tax is likely to take and review the future issues a government would face in implementing such a tax.

The Labour Party has said that if the tax is implemented by them it will be proportionate and progressive, meaning homeowners of houses worth just over £2 million will not be expected to make the same contribution as significantly more valuable properties. The Shadow Chancellor has also said that the threshold would rise in line with house prices, to prevent property inflation bringing more properties above the tax threshold in the future.

Due to the continuing rise in property prices the tax, if introduced, will have a significant impact on property-owners in London. Critics of the tax believe it will disproportionately affect people living and working in London.

Perhaps the main criticism of the proposal has been that it will worst affect those who are asset-rich but cash-poor. The historic inflation in the property market means that many bought their homes years ago for a fraction of what they are now worth today. Particular concerns have been raised regarding those on modest incomes, in particular pensioners.

The Labour Party has said it will put safeguards in place for this category of homeowner. One option could be that homeowners elect for the tax to be payable from their estate when they die instead of paying an annual charge. This will avoid immediate liability, however this will likely result in a significant liability upon death if the annual charges accumulate.

The Liberal Democrats were the first to propose a Mansion Tax in their 2010 manifesto in a similar form to Labour’s current proposal. However, at the Autumn Conference, Nick Clegg suggested that the Liberal Democrats may instead favour a reform of Council Tax instead.

One of the principal obstacles for any high-value property tax will be the valuation of properties. As the intended threshold is £2 million the difficulty will be ascertaining the value of properties worth roughly that amount. The bureaucratic burden of valuing properties which are above or may be above £2 million is likely to mean implementation is very expensive.

The existing Council Tax bands were calculated in relation to what properties were worth on 1 April 1991. At present, it is unclear how the valuing of homes will be carried out and who will be responsible for the valuations. There is a chance that the cost of a valuation will be borne by the owner.

The favoured recommendation given by those opposed to a Mansion Tax is the revision of the current Council Tax system, the objective being to bring the Council Tax bands in line with current property values. The argument is that this would provide a more practical and cost effective alternative to the Mansion Tax.

This article was written by Ian Bradshaw, Partner, with assistance from Trainee Solicitor Freya Marks.

If you would like any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.  This guide is for general information and interest only and should not be relied upon as providing specific legal advice.