Mansion tax a poor substitute for wider reform of council tax says Duncan Bowie
This is not a redistributive budget. The freezing of income tax thresholds will hit all households. The Government should instead have increased the rates of income tax for higher-income households.
Increasing tax on landlords’ income will no doubt be passed on to tenants in the form of higher rents. It may also lead to some landlords withdrawing from the housing market, which will mean a loss of supply for lower and middle-income households who cannot access council housing or the home ownership market. The main budget proposal to impact on housing is the so-called “mansion tax”. The surcharge on council tax for higher value properties is a poor substitute for a wider reform of the council tax system. The banding of the surcharge into four property value groupings, however, means that the owner of a property worth £50 million (yes, there are some) will pay only £7,500 a year, the same as the owner of a £5 million house. Moreover, about half the households that will qualify for the surcharge, with homes valued at over £2 million, are pensioners, without significant additional income and assets (other than their homes) to sell, and may struggle to pay the lowest rate of £2,500 a year. Many may have bought their homes 30 or even 40 years ago for prices under £500,000 thirty years ago or as little as £100,000 forty years ago. The Government is not going to introduce the new tax until 2028, with the tax estimated to raise only £400 million a year, the delay no doubt because the Government will have to value 300,000 properties and determine arrangements for exemption and deferral for those households who cannot afford to pay. There will also be challenges to valuations just above the various thresholds – a proportionate system would be more progressive. Much more sensible would have been a proportionate tax on all property sales – say 10%. Applied from April 2026, this would have brought in significantly more revenue much sooner. Discounts would be required for households moving to smaller properties to encourage downsizing, but this would have been relatively simple to administer.
Whether the budget proposal will have a significant impact on house prices is unclear. House prices at the upper end of the market are fairly stagnant at present, and taxing existing owners at the higher end will not necessarily increase housing affordability at the lower end of the market. The proposal is, of course, not a housing policy, but a policy aimed at raising government revenue and a tax which will only impact very marginally on the very rich. It is a very poor substitute for the measures which could have been introduced to tax serious wealth and high income, such as a tax on the purchase of luxury items or a supertax rate on those with annual earned and unearned income of say over £250,000 a year.
The proposal in the budget does not help local authorities, as the receipts from the new tax would be paid to the Treasury, so councils will still need to increase council tax rates to maintain local services and minimise cuts. The budget does not provide sufficient resources to local authorities in the short or long term, for which the Government still lacks a coherent strategy and funding framework.
The Budget also included the freezing of the local housing allowance. This is the benefit paid to tenants on low incomes to help them pay for their rent. Rents are generally increasing and in many areas are well above the allowance cap. Freezing the allowance will mean more tenants being pushed into arrears and at risk of eviction. There is a potential for increased homelessness with increased costs for local authorities in providing temporary accommodations, as well as the disruption caused to the lives of many households. Yet the Government is not making significant additional funding to local authorities to help the increasing costs of homelessness, which is already forcing many local authorities into significant financial deficits. This is a bad decision with significant negative consequences.