What is a ‘mansion tax’ and how would it work?

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With less than a month until Labour’s autumn budget, the Treasury is reportedly considering ways to shake up property tax in the UK, including a controversial new tax on high-value properties.

Chancellor Rachel Reeves may need to find at least £22bn in upcoming fiscal activity as weak growth forecasts continue to narrow her room for maneuver, researchers from the Institute for Fiscal Studies (IFS) have warned.

Adding to the government’s woes are reports from the Office for Budget Responsibility (OBR) that the UK’s productivity performance will suffer, creating a further £20bn shortfall in public spending.

As living standards continue to fall in the UK, ministers have insisted that any tax increases must be focused on the wealthiest. The Chancellor is understood to be currently considering a so-called ‘mansion tax’, which would see a new tax imposed on high-value property owners.

Different versions of how the tax would work were introduced, both with the potential to raise significant sums for the exchequer.

Researchers from the Institute for Fiscal Studies (IFS) recently warned that Chancellor Rachel Reeves may need to raise at least £22bn in upcoming fiscal activity (PA Wire)

Recently, it was reported that the Chancellor was considering a simple tax on property owners worth at least £2 million, with an annual fee of one per cent of the amount above this threshold. This would mean an annual fee of £10,000 for homeowners with properties worth £3 million, for example.

Earlier in the year, it was reported that a less radical and lower-income mansion tax could be introduced by changing the taxation of capital gains.

In the UK, capital gains tax is payable on the sale of most high-value assets. This includes estates, stocks and estates worth over £6,000.

However, a homeowner generally does not currently need to pay capital gains tax on the sale of a property that was his primary residence while he owned it.

This will change when the property value of the house being sold is £1.5 million or more, under proposed plans.

The way capital gains tax works on real estate sales requires sellers to calculate the “gain” they receive from the asset. This is usually the difference between the amount they paid for the property and the amount they sold the property for.

Former IFS director Paul Johnson recently told The Independent the government should reform taxes to ensure council tax is proportionate to the current value of a property (P.A.)

If it is above this value, or if the seller gets capital gains tax relief (£3,000 each year) above this value, they will need to report and pay the tax.

For higher or additional rate income taxpayers, the rate is 24 percent. For those with a basic rate, the rate is 18 percent.

Many economists have warned the Chancellor against both tax models, arguing that they would add a new layer of complexity to an already opaque property tax system.

Many have instead called on the Chancellor to consider a complete overhaul of the system, starting with council tax, which still charges homeowners based on valuations carried out in 1991.

Former IFS director Paul Johnson said recently:Independent The government needs to reform taxes to ensure that council tax is proportionate to the current value of a property and also abolish stamp duty.

He added that manor tax on properties valued at more than £2 million makes “some sense” but warned it “will not increase enough to fill a significant gap”.

“These types of homes are definitely undertaxed right now,” he said. “I would be much happier if there was a comprehensive reform of property taxes that made council tax proportionate to existing value and abolished stamp duty.”