Unintended consequences: the anti-growth ‘Mansion Tax’
The government has a wretched track record when it comes to measures stimulating the economy, (although its predecessor was little better). Another measure that risks damaging growth, is waiting in the wings; the inelegantly titled High Value Council Tax Surcharge (HVCTS) announced by the old Chancellor, Rachel Reeves, in 2025, and due to come into effect from April 2028.
Dubbed the ‘mansion tax’, eighteen months hence, homes in England currently worth £2 million or more (2026 is the base year for valuation) will pay the Surcharge, an annual tiered impost starting at £2,500 per year but rising to £7,500 for properties valued over £5mn. After accounting for falls in value as markets adjust to the new tax (collected by Councils but with proceeds flowing to the Exchequer for general tax purposes) the expectation is that it will snare in its current guise, just over 150,000 properties.
What is remarkable about this new tax is how little revenue (gross and net) it is expected to recoup for the Exchequer. The Office for Budget Responsibility’s (OBR) central estimate, to which it attaches a high level of uncertainty, is a trivial £400m in 2028-9, rising slowly in subsequent years. Tiny, indeed infinitesimally small, compared with a total government tax-take approaching £1Trillion. Moreover, the costs of introducing the tax (valuing relevant properties etc) is expected to come to £275m leaving a net balance of just £125m in 2028-29. Although some initial expenditures are a one-off, continual re-valuations, appeals, and council administration, are likely to produce highish on-going compliance and collection costs.
Apparently ignored is the likelihood of an even lower than published net tax take, possibly even a negative outcome overall. The OBR estimated that there would be a reduction, albeit very small, in the new-build rate for properties valued over £2m. But there is some evidence that the resale market has adjusted to the prospect of the tax by bunching prices below proposed tax thresholds, which, if so, would reduce revenues from Stamp Duty Land Tax (SDLT). The housing market is, however, a chained market where values in a sub-market have repercussions throughout the chain. It is possible that because of behavioural reactions and maintaining price margins, overall reductions in SDLT, not allowed for in government estimates, will cancel out much of the net £125mn.
This of course is a pecuniary effect, a redistribution. Exercising me more is the unintended consequences of the new tax on economic growth. There is a great deal of uncertainty regarding which properties will be caught in the net, and how the tax will play out in the future, tied as it is to CPI for periodic adjustments. And there have been strong rumours that the initial £2mn threshold might be reduced to £1.5mn at a later date.
Most probably this uncertainty will place a dampener on improving the quality of a large number of properties, potentially marginal to a tax threshold. Improving a property’s structure, and its setting, has proved to be a favourite occupation for owners of homes of all shapes and sizes: adding rooms, upgrading bathrooms and heating systems and landscaping gardens. For a vast industry of small builders, work of this nature has been a lifeline, and it has sustained also a large national horticultural industry.
Why spend money adding an improvement if this might propel your home more quickly into a (higher) annual tax net? For the state, any curtailment of this activity would hit the tax revenues, twice over; a loss of VAT on the upgrade spending and a reduction in SDLT on property values lower than they might be otherwise. Of a more serious nature the reduced activity in this ‘house improvement’ sector of the economy will act as a drag on future economic growth. Add up all the negative fiscal and growth effects and the estimated miniscule tax take could disappear entirely, surely a possibility not lost on the Treasury.
So, what is behind it all. A clue is to be found in the May 2026 Consultation document where the Minister in the introduction talked about Mayfair mansions paying their “fair share” of council tax. Apart from the fact that revenues from HVCTS go to the Exchequer, the purpose of council tax is to pay for local services; it is not at all apparent that a property in Mayfair, however grand, has a greater call on council services than small properties. The Mayfair mansion could very well be paying its fair share of costs imposed on the council. If the object is to tax wealthy people more, there are far better, more efficient ways of doing this without adding further to the current overwhelming complexities of the UK tax code.
David Starkie’s latest book is Airport Enterprises: an economic analysis, RPI Oxford.
David Starkie