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: André Spicer
Show Hide image

“It’s scary to do it again”: the five-year-old fined £150 for running a lemonade stand

Enforcement officers penalised a child selling home-made lemonade in the street. Her father tells the full story. 

It was a lively Saturday afternoon in east London’s Mile End. Groups of people streamed through residential streets on their way to a music festival in the local park; booming bass could be heard from the surrounding houses.

One five-year-old girl who lived in the area had an idea. She had been to her school’s summer fête recently and looked longingly at the stalls. She loved the idea of setting up her own stall, and today was a good day for it.

“She eventually came round to the idea of selling lemonade,” her father André Spicer tells me. So he and his daughter went to their local shop to buy some lemons. They mixed a few jugs of lemonade, the girl made a fetching A4 sign with some lemons drawn on it – 50p for a small cup, £1 for a large – and they carried a table from home to the end of their road. 

“People suddenly started coming up and buying stuff, pretty quickly, and they were very happy,” Spicer recalls. “People looked overjoyed at this cute little girl on the side of the road – community feel and all that sort of stuff.”

But the heart-warming scene was soon interrupted. After about half an hour of what Spicer describes as “brisk” trade – his daughter’s recipe secret was some mint and a little bit of cucumber, for a “bit of a British touch” – four enforcement officers came striding up to the stand.

Three were in uniform, and one was in plain clothes. One uniformed officer turned the camera on his vest on, and began reciting a legal script at the weeping five-year-old.

“You’re trading without a licence, pursuant to x, y, z act and blah dah dah dah, really going through a script,” Spicer tells me, saying they showed no compassion for his daughter. “This is my job, I’m doing it and that’s it, basically.”

The girl burst into tears the moment they arrived.

“Officials have some degree of intimidation. I’m a grown adult, so I wasn’t super intimidated, but I was a bit shocked,” says Spicer. “But my daughter was intimidated. She started crying straight away.”

As they continued to recite their legalese, her father picked her up to try to comfort her – but that didn’t stop the officers giving her stall a £150 fine and handing them a penalty notice. “TRADING WITHOUT LICENCE,” it screamed.


Picture: André Spicer

“She was crying and repeating, ‘I’ve done a bad thing’,” says Spicer. “As we walked home, I had to try and convince her that it wasn’t her, it wasn’t her fault. It wasn’t her who had done something bad.”

She cried all the way home, and it wasn’t until she watched her favourite film, Brave, that she calmed down. It was then that Spicer suggested next time they would “do it all correctly”, get a permit, and set up another stand.

“No, I don’t want to, it’s a bit scary to do it again,” she replied. Her father hopes that “she’ll be able to get over it”, and that her enterprising spirit will return.

The Council has since apologised and cancelled the fine, and called on its officials to “show common sense and to use their powers sensibly”.

But Spicer felt “there’s a bigger principle here”, and wrote a piece for the Telegraph arguing that children in modern Britain are too restricted.

He would “absolutely” encourage his daughter to set up another stall, and “I’d encourage other people to go and do it as well. It’s a great way to spend a bit of time with the kids in the holidays, and they might learn something.”

A fitting reminder of the great life lesson: when life gives you a fixed penalty notice, make lemonade.

Anoosh Chakelian is senior writer at the New Statesman.