Mansion Tax
Will the High Value Council Tax Surcharge avoid the pitfalls of its predecessors?
In the last edition, this column looked at how successive governments have grappled with Stamp Duty Land Tax, somehow increasing their reliance on its revenues even as they acknowledge its social and economic drawbacks. This is nothing new: arguments over whether and how land should be taxed, go back to Domesday. The current government’s latest attempt to reconcile its need for revenue while satisfying pleas for greater fairness in land taxes, is the High Value Council Tax Surcharge (HVCTS): the so−called ‘mansion tax’ on owners of residential property in England worth £2 million or more in 2026 and taking effect in April 2028. Affected owners will have to pay between £2,500 and £7,500 a year, depending on value. Here, we look at the underlying issues which beset the taxing of land, historic parallels with the HVCTS − and a peculiar inversion which makes it politically vulnerable.
Land: capitalism's inner conflict
Legally, Capitalism treats land just like any other asset: as a commodity to be traded, something you can own and control. This is odd because, as economists of all colours, from John Stuart Mill to Karl Polanyi have stressed, land is not something that is manufactured or grown. It pre− existed the economy, in a fixed amount. Every parcel of it has a unique location over which every owner is granted monopoly control. And it is a resource which people have no choice other than to use for all terrestrial activities − there are no substitutes. These distinctions distort or even destroy the ability of a free market to fulfil its prime function: allocating a resource efficiently.
Freeholders are not sovereign
Another distinction between owning land and, say, a car or gold bars, is that, because it is physically part of what a nation state is, ownership is granted by the state and exists only as defined by the state. Your home might be your castle, but the state decides how big that castle can be, what you can do with it and that, should you die without inheritors, your land (and its castle) will revert to its ultimate owner − the Crown. When the state taxes your title in a plot of land it is − uniquely − taxing something which, in law, it has created and something with a value determined primarily not by you, but by the activities of the state and its other citizens. This has long concerned economists and politicians, wary of a ‘rentier economy’ dominated by unproductive landlords. These concerns were most fully expressed by Winston Churchill when lending his support to new land tax legislation which today’s HVCTS echoes with concerning accuracy.
Churchill's 'mother of all monopolies'
Supporting the Land Value Duties proposed within the People's Budget of 1909, Churchill described land as 'the mother of all other forms of monopoly'. Evocatively expressing the unearned growth in value enjoyed by owners, he went on to say "Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains − and all the while the landlord sits still”. In a similar vein, the ministerial foreword to this year’s HVCTS consultation document, highlights the injustice that the council tax payable on “a £400,000 house in Darlington, is more than on a £10 million mansion in Mayfair”. As we shall see, however, this argument can run both ways.
Too complex, too costly
The costs of collecting the Land Value Duties proved too high, sometimes exceeding revenues. They were ended by the Finance Act 1920. Parliament stopped future charges, abandoned outstanding assessments and even provided for repayment of amounts already received. Even so, repeated further attempts have since been made to tax land and development gain, without establishing a successful, lasting system. With this in mind, does the HVCTS look set to avoid the pitfalls of earlier attempts?
The downfall of the 1909 Land Value Duties lay in their combination of working from an estimated value not a price paid, of the difficulty in valuing properties which are hard to compare and rarely sold, of the annual recurrence of the tax and thus of these problems and costs, and of their sheer complexity. HVCTS shares all of these features: it seeks to tax all £2 million+ houses, regardless of when they last changed hands. It will be a recurring tax, hence regular revaluations are already planned. These were legislated for in relation to Council Tax too, but proved so politically unattractive that we are still working from 1991 valuations. Finally, HVCTS will be complicated, with not one but four value bands and fixed payments within each. This will encourage the ‘bunching’ of valuations, just as the old SDLT thresholds did and still more valuation appeals, especially during any periods during which values fall.
How much will HVCTS raise?
The Office for Budget Responsibility estimates that the surcharge could raise about £605m a year from 165,000 houses, before “behavioural effects”. These effects include exemptions, the cost of appeals and price suppression at thresholds and their associated SDLT losses.
The OBR assumes that one in five owners will challenge their valuation and that 40% of those will be successful. Net revenue after all of these costs, aside from the one−off £150m cost of the initial valuations, falls to roughly £400m pa (about 2.5% of SDLT revenues).
The political risk
Of those 165,000 homes, 85% are in London and the South East and over 70,000 are thought to be in the lowest £2m − £2.5m band. The owners of quite a large number of these look set to take Churchill’s argument head−on. ‘Yes’ they will say ‘I have done nothing to make the value of my property rise to just over £2 million. But it’s not a mansion. It’s a modest family house with a value I can’t access without moving. Why should I pay more to stay here?’
In themselves, these owners are probably not numerous enough to threaten the survival of HVCTS. However, if they organise − and there are clear signs that they are doing so − they might aim to show that this is a plan which has not been properly thought−through and thereby wield a threat of real political damage. Given the number of precedents, one has to hope that such a vulnerability is not there. Either way, the conflict embedded within our market system, between land as home and land as a tradable store of value, continues to disrupt.
