Tens of thousands of pounds are to be wiped off the value of homes worth over £2 million by the “mansion tax” announced by Rachel Reeves in her Budget, say leading economists.
The Institute for Fiscal Studies stressed that one in four of the properties impacted by the new levy are in just three London boroughs: Kensington and Chelsea, Westminster and Camden.
It also said parts of the property market in the capital could slow down due to nervousness about whether properties will be caught by the “mansion tax” and if so by which band.
Ms Reeves is introducing a high value council tax surcharge, which has been called a “mansion tax”, in England on homes above £2 million from April 2028.
There will be four price bands with the surcharge starting at £2,500 a year for properties worth over £2 million to £2.5 million, £3,500 for those valued at £2.5 million to £3.5 million, £5,000 for homes worth £3.5 million to £5 million, and £7,500 for properties worth more than £5 million.
The charge will sit on top of usual council tax and will be applied to property owners, rather than tenants.
The Government estimates that fewer than 1% of all UK properties will be subject to the additional tax but that it will raise more than £400 million in 2029-30.
The tax measure will primarily affect properties in the London and the wider South East, where 69% of all UK homes above £2 million are located, according to the IFS.
Stuart Adam, senior economist at the Institute for Fiscal Studies, said the value of properties hit by the mansion tax would fall by the “stream” of payments due under the new levy.
Even at the lowest band of £2,500 a year, the bill would jump to £20,000 within eight years.
For the £5,000 band, the total would rise to £30,000 within six years.
Mr Adam said: “HMRC and the OBR (Office for Budget Responsibility) assumed forecasts are that the extra tax due on these will be reflected fully in property prices.
“Property prices will fall by the expected stream of tax payments due to be paid on those properties.
“I think that is pretty much right.
“I would expect property prices to fall by that amount.”
In London, there were 6,574 properties sold for over £2 million in the last two years, according to the IFS.
This total included 2,177 sold for between £2 million and £2.5 million, 1,784 between £2.5 million and £3.5 million, 1,044 between £3.5 million and £5 million, and 1,569 for over £5 million.
Mr Adam added that there had been “quite a bit of talk” that the “mansion tax” could lead to a big fall in property transactions which he doubted would happen if everyone knew what the valuations of properties were going to be.
But he explained: “What might do that is uncertainty around valuations and particularly the properties that look like that they may be around the thresholds, between the different bands, then there is a risk that the uncertainty about what tax liability is going to go with that property means that sales of those type of properties around the threshold go down in the run-up to the introduction of the tax.
“That should be a temporary effect.
“I’m not sure it would necessarily be a huge effect, it’s likely to be localised around the thresholds.
“But I think there will be some effect of that.”
Borough/local authority |
% of homes sold for over £2 million in the last two years |
Kensington and Chelsea |
30% |
Westminster |
27% |
City of London |
17% |
Camden |
13% |
Hammersmith and Fulham |
9% |
Elmbridge |
7% |
Richmond upon Thames |
6.5% |
Islington |
6% |
Wandsworth |
5% |
Barnet |
4% |
Source: IFS |
In her Budget speech, Ms Reeves made clear that she saw the mansion tax as addressing an imbalance in the property taxation system.
She said: “I will take further steps to deal with a longstanding source of wealth inequality in our country.
“Currently, a Band D home in Darlington or Blackpool pays just under £2,400 in council tax, nearly £300 more than a £10m mansion in Mayfair.
“And so from 2028, I am introducing the High Value Council Tax Surcharge in England.”
Other measures in the Budget include:
* A further three-year freeze on income tax thresholds, until 2030/31, which will hit millions of higher earners by on average £600 a year, and those paying the basic rate by £220. Hundreds of thousands of people will be dragged into paying higher tax rates.
* Moves to cut household energy bills by £150 by next April.
* Lifting the two-child cap, which will benefit nearly 1.5 million children in England including 260,000 in London.
* A new pay-per-mile tax for electric vehicles.
* Increased taxes on online betting.
* A £2,000 limit on how much money people can put into their private pension pot, through a scheme called a salary sacrifice, before it incurs tax.
* Reducing the cash ISA limits from £20,000 to £12,000.
* Freezing rail fares in a move which could save London commuters up to £350 a year.
* Above inflation rises in the National Living Wage and minimum wage.
* Fuel duty is frozen until next September.
Ms Reeves, though, continued to face accusations of breaching Labour’s election promise not to raise taxes on “working people” after deciding to keep tax thresholds frozen until 2030/31 and levying national insurance on some pension contributions.
The Chancellor sought to defend herself, stressing that the manifesto had been “very clear it was the rates of income tax, national insurance and VAT” that would not be raised.
But she added: “I’m not going to get into semantics. I recognise that we are asking people to contribute more by freezing those allowances.”
