How the mansion tax will work, and who it will hit

If you're planning to own a mansion in the future, the tax isn't as bad as it seems…

Let's clear up one myth about the mansion tax straight away: it is not going to work the way Tim Montgomerie suggests in his Times column today. Montgomerie writes:

Last week Ed Miliband joined Nick Clegg in proposing a mansion tax so that the people who live in London’s parallel universe — many of whom come from overseas and pay little in the way of income taxes — might make a greater contribution. It was a perfectly reasonable intervention but, in a sign that the Conservative Party still hasn’t understood why it can’t win elections, many Tory MPs reacted with fury. Such a tax was, they complained, unfair on the person in a £2 million home who didn’t have the necessary £20,000 to spare.

A person with a £2m home would pay nothing in tax under any version of the mansion tax previously suggested. A £20,000 tax bill implies a house worth £4m. That's because the tax Miliband eventually produces is near certain to follow the same lines as the Lib Dems' desired tax, and be set at 1 per cent of the value of the home above £2m.

The reason why is obvious: if the tax was set at 1 per cent of the total value of any home above £2m, then there would be a huge incentive to depress, either artificially or actually, the value of the home. If your house was worth £2,010,000, it would be worth paying someone up to £10,000 to come round and do £10k worth of damage to it.

More practically, the lack of a cliff-edge at which the tax comes in is also likely to prevent it doing too much to property values. It will have a depressive effect, getting stronger as the house gets more valuable, and will likely knock quite a bit off the price of a £4m house. But the changes will be about pricing in the expected future cost of the tax to the sale price, not about avoidance. For much the same reason that no-body ever says "no thanks, I'd rather earn just £8,104 and not pay tax on my income", houses aren't going to start being sold at £1.99m in any real numbers.

But that example does reveal one of the bigger problems with the fairness of the tax. No, it's not the ridiculous example given by Toby Young of someone who finds themselves living in a £4m house without the money to pay the tax bill. If you can sell your house, buy a £2m one, and pocket the lifetime earnings of someone on the median wage as the difference, you do not really get to plead poverty.

Instead, it's that the vast majority of the incidence of the tax will be on the people who own the houses today. The depressive effect it will have on house prices will be pretty much instantaneous, and will then sit there forever. The tax will also slightly dampen the rate at which house prices above £2m increase — because every £100 increase in price imposes a £1-a-year increase in tax liability — but that is small fry compared to the initial hit.

That quirk explains why the suggestion of a tax provokes such vociferous outrage amongst those owning £2m+ houses. It really is unfair on them; but it's not a matter of unfairness against the rich, so much as unfairness against this generation of the rich. And really, for a government which has done so much to harm the cause of intergenerational fairness, that's a small hit in return.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Amber Rudd's report on the benefits of EU immigration is better late than never

The study will strengthen the case for a liberal post-Brexit immigration system. 

More than a year after vowing to restrict EU immigration, the government has belatedly decided to investigate whether that's a good idea. Home Secretary Amber Rudd has asked the independent Migration Advisory Committee to report on the costs and benefits of free movement to the British economy.

The study won't conclude until September 2018 - just six months before the current Brexit deadline and after the publication of the government's immigration white paper. But in this instance, late is better than never. If the report reflects previous studies it will show that EU migration has been an unambiguous economic benefit. Immigrants pay far more in tax than they claim in benefits and sectors such as agriculture, retail and social care depend on a steady flow of newcomers. 

Amber Rudd has today promised businesses and EU nationals that there will be no "cliff edge" when the UK leaves the EU, while immigration minister Brandon Lewis has seemingly contradicted her by baldly stating: "freedom of movement ends in the spring of 2019". The difference, it appears, is explained by whether one is referring to "Free Movement" (the official right Britain enjoys as an EU member) or merely "free movement" (allowing EU migrants to enter the newly sovereign UK). 

More important than such semantics is whether Britain's future immigration system is liberal or protectionist. In recent months, cabinet ministers have been forced to acknowledge an inconvenient truth: Britain needs immigrants. Those who boasted during the referendum of their desire to reduce the number of newcomers have been forced to qualify their remarks. Brexit Secretary David Davis, for instance, recently conceded that immigration woud not invariably fall after the UK leaves the EU. "I cannot imagine that the policy will be anything other than that which is in the national interest, which means that from time to time we’ll need more, from time to time we’ll need less migrants." 

In this regard, it's striking that Brandon Lewis could not promise that the "tens of thousands" net migration target would be met by the end of this parliament (2022) and that Rudd's FT article didn't even reference it. As George Osborne helpfully observed earlier this year, no senior cabinet minister (including Rudd) supports the policy. When May departs, whether this year or in 2019, she will likely take the net migration target with her. 

In the meantime, even before the end of free movement, net migration has already fallen to its lowest level since 2014 (248,000), while EU citizens are emigrating at the fastest rate for six years (117,000 left in 2016). The pound’s depreciation (which makes British wages less competitive), the spectre of Brexit and a rise in hate crimes and xenophobia are among the main deterrents. If the report does its job, it will show why the UK can't afford for that trend to continue. 

George Eaton is political editor of the New Statesman.