Pre-Budget Speculation: Mapping The Mansion Tax

You wait all summer for a trial balloon and then two come along at once.

Until recently, the main concern for the property market had been the rise in mortgage rates due to the Middle East conflict, a subject we explored here and here.

The sort of speculation that caused buyers and sellers to hesitate ahead of last year’s Budget was largely absent.

That changed on Saturday when The Times reported on its front page that the government may lower the bottom threshold for the high-value council tax (HVCT) to £1.5 million from £2 million.

Reports the government may increase capital gains tax re-surfaced soon afterwards.

The justification for both rumours appears to be the worsening financial backdrop of rising government borrowing costs as the unpredictable conflict in the Middle East unfolds and threatens to push UK inflation higher.

However, this year’s trial balloons may not have been released by the Treasury, as I discuss on the latest episode of Housing Unpacked with James Nation, a former special advisor to Rishi Sunak at Number 11 Downing Street.

Avoid Rumours

He said Andy Burnham and Chancellor John Healey instinctively prefer to avoid these sorts of rumours.

The recent leak of a 50-page policy document drafted for former Prime Minister Keir Starmer may have helped fuel some of the speculation, said James.

Whatever the origin, he believes Healey needs to find several billion pounds to rebuild his financial headroom to around £15 billion from an estimated £10 billion. Familiar constraints around spending cuts, borrowing more and breaking manifesto tax commitments put assets and wealth back in the spotlight.

Listen to the podcast to hear which tax announcements would surprise James and which would not. We also explore a possible comeback for Help to Buy, the case for extending National Insurance contributions to landlords and the chances of an early general election.

Growing Consternation

The proposal to drop the lower threshold for the HVCT will cause concern in outer London boroughs and parts of south-east England in particular.

Anyone in a home whose value could reach seven figures in the next several years must wonder if they will be next. If the current speculation proves accurate, the government would be widening the tax net before the measure has even been introduced.

Whatever bands are used, it will inevitably lead to more pointed negotiations between buyers and sellers and bunching below price thresholds, creating the sort of distortions that existed under the stamp duty slab system.

It may discourage up-sizers but could have the opposite effect on downsizers as homeowners seek to avoid paying higher charges. That could lead to headlines about asset-rich and cash-poor elderly individuals being forced to move from neighbourhoods they grew up in, which may be a political trade-off the current administration is prepared to make.

Initially, the thresholds will also present a problem for valuers, especially if the entry point drops to £1.5 million. Knight Frank estimates there are 73,600 properties worth between £1.8 million and £2.2 million, which is the valuation grey area either side of the proposed bottom threshold.

If that dropped to £1.5 million, the grey area would expand to 222,800 properties, trebling the size of the valuation headache.

Measuring the Gulf

We have attempted to quantify the regional differences that have led to the accusation that the HVCT is targeted at London and south-east England. 

Based on the minimum floor space of 538 sq ft (50m2) for a one-bedroom two-person flat under the Nationally Described Space Standards, we have calculated how many could be purchased in each local authority in England and Wales for £1.5 million to highlight the discrepancy in floorspace that exists across the country.

For example, £1.5m would buy the equivalent of 2.2 flats in the London borough of Kensington and Chelsea, based on an average value of £1,168 per sq ft in the local authority. For the same sum, you could buy 20 flats in Hartlepool. For a one-bedroom flat bought in prime central London for £4,000 per square foot, the same calculation means you get 29 times more floorspace in Hartlepool.

Hover over the maps below to see the full data.

Whether the Treasury launched the latest trial balloons or not, they will clearly be watched more closely in some postcodes than others.