"Does valuing a property just above a particular threshold, thus making it liable for an additional payment, itself reduce the value? Will people be put off renovating or extending their homes?"
- Tom Bill - Knight Frank
Revaluing properties in the top three council tax bands could prove costly and disruptive. The proposal highlights how backbench politics is driving this week’s Budget.
Dinner party conversations about house prices could become a lot more heated if the latest pre-Budget speculation is to be believed.
Reports last week suggested that properties in council tax bands F, G, and H will be revalued, with the most expensive homes paying a surcharge, presumably to central rather than local government.
There is ambiguity around price thresholds and the precise method, but it appears some form of ‘mansion tax’ will be announced on Wednesday.
It would be one item on the Chancellor’s so-called smorgasbord of tax rises designed to plug the Treasury’s £30 billion black hole. The need for a more piecemeal approach was triggered by last week’s abandoned plan to increase income tax, which would have raised a bigger sum but breached the party’s manifesto and triggered a revolt on the Labour benches.
The result is a Budget that feels like it will please the Labour Party more than the electorate or bond market. One that is primarily designed to guarantee the near-term survival of Rachel Reeves and Kier Starmer. The direction of travel became clear in July, when the government abandoned welfare spending cuts to quell a backbench rebellion.
We will be able to gauge the reaction of businesses, voters and bond investors (who lend money to the government) after Wednesday, but the latest council tax proposal comes with its own set of challenges.
Logistical hurdles
The first one is logistical – how do you accurately value the 2.4 million homes in the three council tax bands?
A valuation that does not go into sufficient detail can be legally challenged, which immediately raises the question of government resources.
Properties near price thresholds create the biggest headache, and challenges can cost the government time and, more importantly, money.
Higher-value homes are particularly complex to value because there is less uniformity between properties.
The plan raises other questions. Does valuing a property just above a particular threshold, thus making it liable for an additional payment, itself reduce the value? Will people be put off renovating or extending their homes?
And relying on price indices for valuations comes with its own problems, which is why Nationwide states that while its index represents a typical UK property, there is no such thing as a typical UK property.
It shows that UK mainstream prices have risen by 41% over the last 10 years, but average prices in prime central London have fallen by 21%, Knight Frank data shows, which is quite a gap.
Political optics
One key reason for the decline is the stamp duty hike for higher-value properties in 2014. If you tax so-called mansions, you end up with fewer of them.
The government is reportedly looking to raise £600 million from the latest proposal, which is not an especially large amount when you consider the headaches. The political optics of a ‘mansion tax’ are clearly too difficult to ignore.
Not that the properties themselves will all resemble mansions. Four in ten properties in council tax bands F to H are not even detached.
Geographically, the impact would fall overwhelmingly on the economic epicentre of London and south-east England. Uneven price growth in recent years could also mean that band D and E properties are exempt but worth more than those captured by the new tax.
That is, before the inevitable headlines about pensioners living in larger houses being forced to leave their neighbourhoods, or questions around how much this will yield if, as has been reported, it can be deferred.
The RICS definition of market value is: “The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion.”
Once there is clarity, property prices can recalibrate. Until then, acting knowledgeably could be simpler for some than others.
