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
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Who will win the Copeland by-election?

Labour face a tricky task in holding onto the seat. 

What’s the Copeland by-election about? That’s the question that will decide who wins it.

The Conservatives want it to be about the nuclear industry, which is the seat’s biggest employer, and Jeremy Corbyn’s long history of opposition to nuclear power.

Labour want it to be about the difficulties of the NHS in Cumbria in general and the future of West Cumberland Hospital in particular.

Who’s winning? Neither party is confident of victory but both sides think it will be close. That Theresa May has visited is a sign of the confidence in Conservative headquarters that, win or lose, Labour will not increase its majority from the six-point lead it held over the Conservatives in May 2015. (It’s always more instructive to talk about vote share rather than raw numbers, in by-elections in particular.)

But her visit may have been counterproductive. Yes, she is the most popular politician in Britain according to all the polls, but in visiting she has added fuel to the fire of Labour’s message that the Conservatives are keeping an anxious eye on the outcome.

Labour strategists feared that “the oxygen” would come out of the campaign if May used her visit to offer a guarantee about West Cumberland Hospital. Instead, she refused to answer, merely hyping up the issue further.

The party is nervous that opposition to Corbyn is going to supress turnout among their voters, but on the Conservative side, there is considerable irritation that May’s visit has made their task harder, too.

Voters know the difference between a by-election and a general election and my hunch is that people will get they can have a free hit on the health question without risking the future of the nuclear factory. That Corbyn has U-Turned on nuclear power only helps.

I said last week that if I knew what the local paper would look like between now and then I would be able to call the outcome. Today the West Cumbria News & Star leads with Downing Street’s refusal to answer questions about West Cumberland Hospital. All the signs favour Labour. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.