Coffee House

Why George Osborne had to kill the mansion tax

7 October 2012

7 October 2012

This morning the Mail on Sunday reported that George Osborne has promised there will be no mansion tax, no wealth tax and the council tax freeze will be extended. Homeowners are safe for now, but why has Osborne made that call?

It might be something to do with a past Conservative Party Conference back in 2007 when the party was in a similarly dire situation. The then Shadow Chancellor pledged to cut inheritance tax by increasing the threshold, put Gordon Brown off calling an early election and ended the honeymoon it is now hard to believe he ever enjoyed.

Britain already has the highest property taxes of any developed economy and council tax is desperately unpopular. You could argue that a new, more progressive, property tax would win people over. Council tax isn’t exceptional though. In the United States, property taxes have led to more taxpayer revolts than any other tax. There are very basic reasons why property taxes tend to be unpopular: they are paid as big lump sums and most people feel losing £10 more than earning £10 less (a phenomenon known to psychologists as loss aversion).

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The fundamental problem is that people with significant assets don’t necessarily have significant incomes. Particularly later in their life, plenty of people have built up valuable properties over time but don’t make that much money each year. You pay taxes out of your cash income, not your net wealth.

Proponents of the tax have an answer for that one. Apart from the weird idea of imposing the tax at the point of sale, which would make the tax a supplement to the already formidable stamp duty singling out family homes that people own for longer. To quote the Janan Ganesh in the Financial Times, there is “such a thing as equity release”.

Equity release essentially means borrowing to pay the tax until you die. Then it is paid out of your estate. That turns a wealth tax or a mansion tax into an inheritance tax. And, thanks to the cost of equity release policies, a very high inheritance tax. We worked out just how high for the 2020 Tax Commission’s final report, the Single Income Tax:

If someone owned a house worth £500,000 from the age of 55 till they died at 80, a wealth tax of one per cent on its entire value would mean they would have to pay £130,000 – 26 per cent of its value in tax. If they borrowed the £5,000 each year, at a typical interest rate on an equity release policy of around seven per cent, that would mean a total bill to their estate of £343,382, or 69 per cent of its value.

For a property of £2 million, under the same assumptions, the total charge on their estate would be £1,373,529. Assuming the existing Inheritance Tax remained in place, that would further reduce the total value of their estate, equivalent to a very high combined rate of 75 per cent (with no threshold).

You can see how a Chancellor of the Exchequer whose political reputation rests, in large part, on an inspired decision to cut inheritance tax might see a massive hike in the tax as a bit of a bad idea.

Matthew Sinclair is chief executive of the TaxPayers’ Alliance.

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Show comments
  • ReefKnot

    As I understand it, if you levy a Mansion Tax, and that is paid for by Equity Release, it becomes a charge on the estate, thus reducing the Inheritance Tax take, so rendering the Mansion Tax pointless. What you get now, you lose later.

  • edscriv

    Osborne may be freezing council tax in England, but in Wales we enjoy no such privilege. Here in Conwy in North Wales we’ve been told to expect a 5% rise next April, on top of the 4% applied this year. This from a local authority recently criticized in an auditors’ report for huge overspending on contracts. Meanwhile the Wales Government seems indifferent.

  • mombers

    Why living near the Tube will cost an extra £27k:

    Top schools ‘cost £34,000’:

    So if you have a nice house in London near a tube station and in the catchment area of a good school, the government gives you £127k, for which you pay absolutely nothing more than the renter next door. Yet if you go out and make £127k through your own sweat, the government will punish you with a massive tax bill.
    It’s all fine complaining about the asset rich – cash poor but it’s a zero sum game. To coddle the widow in the mansion, you have to shaft the income rich, asset poor with all the tax burden. So what do we want to discourage more: consuming as much housing as you like or working hard and creating wealth?

  • Mark Wadsworth

    This is Home-Owner-Ist drivel from the usual suspects.


    The Right, as well as not being noticeably Right, are useless at political fighting. We’ve had weeks of self-righteous opprobrium dumped on Mitchell because some vulnerable emotionally sensitive (despite being armed to the tits) politically opportunistic Plod thinks she was called a pleb, yet whenever expensive housing is mentioned nobody thinks to hurl whatever comes to hand at Mandelson, Kinnock, Blair, Preston, Milliband, Balls etc. etc. etc. etc., and ask a few searching questions about how come the leading socialists are in the famous 1%??!!??
    I should add that I make this point only about how rubbish the Right are in disporting good argument, and in no way as any defence of Mitchell who I’m quite sure sweats an air of entitlement as odious as the stench of hypocrisy still choking us all from MilliBean this week.

    • HooksLaw

      You are quite right the mainstream ‘Right’ are indeed very poor at politics. In one respect we should find that comforting.
      But just look back, at a PMQs a while back Cameron made perhaps one of its funniest responses to a sour faced sour puss over-hysterical screaming socialist harridan and labour and the PC brigade went berserk in their spittle howling frenzy. The media happily complied. Can’t win.

      The police, its hierarchy so widely politicised by Blair, have their own interests in trying to undermine this govt. Its the police ineptitude that led to phone hacking under labour being ignored. They have much to fear, but fortunately for them they are doing the investigating.
      As for the Police Federation, well say no more…

      • IRISHBOY

        Indeed so, but the media need access to Government much more than a healthy Government ever needs the media, so if the Right chucked back what the Left chuck in the first place day in day out, then a media starved of inside information with no preening ministers filling pages and hours would soon make the necessary rearrangements if for no other reason than staying in business and looking after their vanity.

  • Phil D

    They want more of my hard earned tax occurred and paid cash. Hardly fair given the amount I already have to give them. I’m with the other poster. I am selling up and taking me and my family on holiday as much as I can. WE may as well get the benefit of my very long endured effort. B*******s.
    Calm down man, they ain’t done it yet. Booked a cruise anyhow.

  • David B

    It is interesting that a party who have campaigned to get rid of council tax and replace it with a local income tax are so fixated on a tax on people homes!

  • Richard Mullens

    Sack high paid (and lower paid civil servants) such as those at the department of Business Innovation and Skills (BIS – which morphed from the DTI via BERR) and local council planners. These people (& the UKBA and the home office not to mention traffic wardens) produce nothing, cost us money and obstruct progress. It would be better to pay them dole money. Some proportion at least should be able to get productive work.

    • PJLennon

      Fascist claptrap!

      • IRISHBOY

        Don’t you just love an argument swathed in eloquent empiricism . . . .

    • HooksLaw

      Interesting point.
      Traffic wardens would in fact produce something if they did their job and actually helped manage traffic instead of acting as de facto tax collectors.

      The reality is of course that scores if not hundreds of thousands of civil service and local authority jobs are already being cut.

      • Richard Mullens

        10% cuts ? 90% would be better and sell the expensive buildings that house them. Before I was made redundant by a private company, it sold buildings, and had recruitment freezes and travel bans.

        While we’re at it, let’s not forget the MoD and the DfT. It’s time they realised who pays their wages and inflation proofed pensions.

  • Apples and Oranges

    Matthew Sinclair is being disingenuous with his figures. Property prices wouldn’t stay stagnant in an economy that would have interest rates at 7% per year. One would anticipate that house prices would quadruple (or more) over 25 years so that the £340K charge would not be on a value of £500K but on a value of £2Million, a charge of less than 20%.

    • hexton

      In that case, would not the annual charge also have increased, in line with the market value of the property, to an overall total of well over £340k?

  • ehup

    The problem with this tax is that it is just the beginning, how long before the thresholds start tumbling and it becomes a blanket property tax?

    • telemachus

      You clearly have the reasonable view that all property is theft

    • Olaf

      May I introduce you to the politician’s friend “Fiscal Drag”. He drags everyone into tax brackets and allow the politician to say, with a straight face, that he/she is not increasing anything.

  • LordBlagger

    Here’s a solution to government debt.

    Everyone gets a pro rata share. They can use equity release for paying off the debt. They could sell a kidney.

    However since the government debt is 240,000 per person (pensions included), I doubt that is enough.

    Face up to the music, the state is bankrupt.

    • HooksLaw

      Welcome to the intrepid gang of coffeehousers who make a living spouting endless bollox.
      The state is not bankrupt, we can service our debt, indeed we are paying quite low interest rates on our debt. But servicing the debt impoverishes us and the only reason we are not paying higher rates is that the lenders have confidence in our ability to pay and willingness to reduce our need for borrowing in the future.

      Socialists do not understand that high levels of debt impoverishes us (not least the poorest) and treat more debt as a quick easy fix to perpetuate their harebrained policies and to bribe their supporters.

      • George_Arseborne

        HooksLaw states that low interest rate is due to the fact that this nation has an independent currency which can be manipulated at random. E.g. ciuld be printed and pumped into the economy in the name of Quantitative Easing,. Therefore it is not because of this government policies. US got downgraded but their borrowing late got lower,hope you get the drift.

    • dalai guevara

      Inflate it away then – has anyone declared yet they were not going to do that?

  • 2trueblue

    I can’t remember people being able to write off the loss when house prices plummeted? It is an envy tax that hits people who have bought their property and looked after it to provide a haven for themselves and their families. A local tax based on your income would be interesting to look at as it bears some resemblance to ability to pay. Also every tax payer would pay and as they all use the facilities would be fairer.

  • telemachus

    I’m not surprised Nick Clegg can’t persuade the Tories that a “mansion tax” would be a good idea. Would turkeys really vote for Christmas?

    A mansion tax should hit any property worth over £1 million. The threshold shouldn’t be any higher than that. Nobody should inherit too much from relatives. It’s simply unearned income.

    • alexsandr

      rubbish. what about people who have bought a house and paid for it through their working life with a mortgage. out of their taxed income?

      You seem to be arguing for an inheritance tax, a very different beast.

      • telemachus

        That too

        • alexsandr

          tell u what tellytubby,. you give your money to the government to waste. Ill keep mine to support me and my family. Hows that for an idea?

          • LordBlagger

            Exactly. Is telly tubby one of the 10 people who volunteered to pay extra tax last year? I doubt it.

            It’s all about screwing other people over.

            It’s all about the government debt.

          • HooksLaw

            But what he wants is for all the money of the hard working to be given to the feckless and when the feckless have wasted it he wants to take even more to top it all up again.
            Its called socialism.

        • MikeBrighton

          If you are not happy with how much tax you pay simply post a cheque to HMRC, they would be more than happy to take your additional payment……

    • John Guest

      Of course they should not – such money should go to the state – so that they can spend it on keeping idle chavs in cider and cannabis – speaking as a self employed taxpayer!

    • MikeBrighton

      Total c*ap. If I buy a house from my earned and highly taxed income and decide on my death to leave it to my children it has NOTHING to do with the state. I quite legally bought and paid for it and the state can f**k off.

      How about reducing tax and the size of the state, so it’s not a predatory wolf sizing up what it can tax next to pay for those lovely public sector non-jobs where essentailly the the votes are being bought for Liebour from my tax.

      • Boudicca_Icenii

        If, on my death, proceeds from the house that I own was going to the State rather than my sons, I’d sell it before I die and move into rented accommodation. I’d then gift them as much as I legally can whilst still alive and spend the rest having a good time.
        I really don’t see why my hard-earned assets should be sold to keep immigrants and the underclass in welfare.

        • Richard Mullens

          Immigrants have nothing to do with it. The majority pay their way. It is attitudes like yours that poisons race relations. You should be ashamed of yourself. Rather than contributing to the solution it is people like you who add to the problem.

        • james102

          This, in fact, is the most important change our political
          class needs to understand. The more diverse a society is the less prepared
          people are to support others. The welfare state was only possible when we had a
          homogenous society ,particularly one that had shared suffering in a war.

          As I have written before,
          the films of the 1950s showed the working class as the salt of the earth,
          they are now portrayed as chavs.Multiculturalism results in separate
          communities sharing the same spaces but having little else in common, why
          should they pay high taxes to support people they have little in common with?

          • Richard Mullens

            Another negative opinion. The solution to a diverse society is to interbreed

            • james102

              No that would just work if we were considering race.

            • Fergus Pickering

              I hope you are doing your bit.

              • Richard Mullens

                :) I try my best !

        • PJLennon

          Please explain who you consider to be the ‘underclass’. This isn’t India old boy, we don’y have untouchables here!

          • Fergus Pickering

            The underclass are the people, together with their vile offspring, who live on state handouts without doing a hand’s turn. Got it?

        • IRISHBOY

          Just a thought from reading Boudicca’s post, is there anything to stop one from selling your home to your children for a couple of quid?
          Would love to know.

          • james102

            No but it is treated as a gift if you go under a bus within
            a certain period.

            • IRISHBOY

              Do you know, if that would stop one quid going to the Treasury then it would be worth it.

            • hexton

              And it would have to be an outright gift, with no strings or backhanded reciprocations. You couldn’t live there any more, for example, unless you paid rent at (what HMRC accepted as) full market rates.

        • inbreda

          you mean as an alternative to having your hard worked income taxed to pay for the immigrants and underclass on welfare? Why? What’s the difference?

      • Pastaface

        Too right. The state is hell bent on maintaining it’s vast parasitic hordes at all costs (to us)

      • inbreda

        If that example existed in real life I would agree with you, but it doesn’t. On average the vast majority of a properties “value” has been built up SINCE it was bought – i.e. the equity in a property is more than likely NOT because of “hard work” or “taxed income”. And if some saddo wants to live alone in a house taht would better suit a family then it IS the concern of the state and society in general. Why tax income? It only encourages people not to work.

        • MikeBrighton

          I buy the house so I take the risk if it increases or decreases in value. This is why for multiple properties capital gains tax is payable but not on your primary residence.
          Your idea of society is a 100% inversion of mine. You are proposing a quasi fascist state that decides how or where you live. In my society you can live where and how you want. If you are lucky enough to have the money to buy a 20 bedroom mansion and as a “saddo” you quaintly describe decide to live alone that’s entirely up to you. It’s your house, your money and your property, and has NOTHING to do with the state.
          I suggest you try North Korea as you model society. I hear Pyongyang is lovely at this time of the year. Not

    • james102

      At the moment we have a Death Tax if it was a real
      inheritance Tax, so it was paid by the person inheriting the money (with a
      sensible threshold) it would not be resented as much.

      The reality is we have reached the limits of taxation as far
      as most people who contribute are concerned. The state needs to be reduced.

      • telemachus

        Not most people
        While such a big divide remains we must tax the rich until their pips squeak

    • David B

      Pure envy. Basically work hard all your life and your marginal tax rate should go up to 100%

    • launcher

      Death is the solution to all problems. No man – no problem.

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