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.

Photo: Getty Images
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The buck doesn't stop with Grant Shapps - and probably shouldn't stop with Lord Feldman, either

The question of "who knew what, and when?" shouldn't stop with the Conservative peer.

If Grant Shapps’ enforced resignation as a minister was intended to draw a line under the Mark Clarke affair, it has had the reverse effect. Attention is now shifting to Lord Feldman, who was joint chair during Shapps’  tenure at the top of CCHQ.  It is not just the allegations of sexual harrassment, bullying, and extortion against Mark Clarke, but the question of who knew what, and when.

Although Shapps’ resignation letter says that “the buck” stops with him, his allies are privately furious at his de facto sacking, and they are pointing the finger at Feldman. They point out that not only was Feldman the senior partner on paper, but when the rewards for the unexpected election victory were handed out, it was Feldman who was held up as the key man, while Shapps was given what they see as a relatively lowly position in the Department for International Development.  Yet Feldman is still in post while Shapps was effectively forced out by David Cameron. Once again, says one, “the PM’s mates are protected, the rest of us shafted”.

As Simon Walters reports in this morning’s Mail on Sunday, the focus is turning onto Feldman, while Paul Goodman, the editor of the influential grassroots website ConservativeHome has piled further pressure on the peer by calling for him to go.

But even Feldman’s resignation is unlikely to be the end of the matter. Although the scope of the allegations against Clarke were unknown to many, questions about his behaviour were widespread, and fears about the conduct of elections in the party’s youth wing are also longstanding. Shortly after the 2010 election, Conservative student activists told me they’d cheered when Sadiq Khan defeated Clarke in Tooting, while a group of Conservative staffers were said to be part of the “Six per cent club” – they wanted a swing big enough for a Tory majority, but too small for Clarke to win his seat. The viciousness of Conservative Future’s internal elections is sufficiently well-known, meanwhile, to be a repeated refrain among defenders of the notoriously opaque democratic process in Labour Students, with supporters of a one member one vote system asked if they would risk elections as vicious as those in their Tory equivalent.

Just as it seems unlikely that Feldman remained ignorant of allegations against Clarke if Shapps knew, it feels untenable to argue that Clarke’s defeat could be cheered by both student Conservatives and Tory staffers and the unpleasantness of the party’s internal election sufficiently well-known by its opponents, without coming across the desk of Conservative politicians above even the chair of CCHQ’s paygrade.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.