Four years after first being proposed, details of a possible mansion tax remain surrounded by uncertainty. Liam Bailey, Knight Frank’s Global Head of residential research, says it is time to cut through the guesswork and provide some clarity on its likely impact. http://www.knightfrank.co.uk/ What do mansions look like, and where do you find them? As Stephen Williams MP notes on the opposite page, there are parts of the UK where a £2m property could be fairly described as a mansion. However in many areas, especially those where most £2m properties are located, they can be anything but. In the following graphic we confirm the distribution of £2m+ properties, by size, type and location.

1. residential RESEARCH
TAXING HIGH
VALUE HOMES
AN ANALYSIS OF PROPOSALS FOR A MANSION TAX, SEPTEMBER 2013

2. AN ANALYSIS OF PROPOSALS FOR A MANSION TAX september 2013
Assessing the proposal
key facts
The Liberal Democrats have proposed
the introduction of a mansion tax on
properties worth £2m+. The tax would
apply to the portion of residential value
over £2m, at a rate of 1% annually.
The proposal is supported by Labour,
and both parties have stated their
objective for the tax to raise between
£1.7bn and £2bn annually.
Based on an investigation into official
data our conclusion is that the
mansion tax, as currently proposed,
will raise approximately £1.3bn
annually, before exemptions.
In order to raise the targeted revenue
the value threshold for the tax would
need to be reduced from £2m to either
£1.5m (to raise £1.7bn) or £1.25m
(to raise £2bn), and potentially even
lower once exemptions and the cost of
collection are allowed for.
Reducing the threshold from £2m to
£1.25m would more than double the
number of properties affected from
55,000 to 140,000.
The tax would be levied
overwhelmingly on London and the
South East of England, with 86.4% of
all £2m+ properties located in those
two regions.
Heritage properties would be targeted,
with 16% of all £2m+ properties being
listed buildings compared to less than
2% of all sub-£2m properties.
With a £2m threshold nearly one in
ten properties defined as “mansions”
would be one and two bedroom flats.
If the £2m threshold were adopted
and not increased in line with house
price inflation, over the next 25 years
a total of 775,500 properties would
be dragged into the mansion tax net,
including all properties with a current
value of £540,000 or more. This means
that some first time buyers buying
through the government’s help to buy
scheme (upper limit £600,000) would
be paying a mansion tax before they
finished their mortgage term.
Four years after first being proposed, details of a
possible mansion tax remain surrounded by uncertainty.
Liam Bailey, Knight Frank’s Global Head of Residential
Research, says it is time to cut through the guesswork
and provide some clarity on its likely impact.
The idea of introducing a new annual tax
on high value property was first discussed
in September 2009 by the Liberal
Democrats. Their initial proposal was for
a 0.5% annual levy on all residential
property value over a threshold of £1m.
It was estimated the tax would apply to
around 240,000 properties, and would
raise around £1bn each year. 1
In November 2009 this initial proposal
was amended, so that a 1% levy would
apply to the portion of a property value
over £2m, which was estimated to apply to
around 70,000 properties. This proposal was
formalised in the 2010 Liberal Democrat
Manifesto, with an estimate that it would
raise around £1.71bn in tax annually. 2
In February 2012 the Labour Party
announced their support for an annual 1%
levy on properties worth £2m and above.
The Labour Party’s objective of raising £2bn
annually from the tax was confirmed in the
House of Commons debate in July 2013.3
We therefore have two current proposals,
one from the Liberal Democrats and
one from Labour, which would tax
residential property values above £2m,
with the aim of raising between £1.7bn
and £2bn annually.
How much will the
mansion tax raise?
At first glance there is a fairly straightforward
calculation to make in assessing the annual
tax take from the mansion tax. Count all
£2m+ properties in the UK, establish their
average value, and calculate 1% of their
combined value above the £2m threshold.
After deducting costs and exempt properties
you have your result.
In reality, however, every part of this
calculation is problematic.
1
2
Step 1: How many £2m+
residential properties are
there in the UK?
Our own calculations point to there being
around 50,000 £2m+ properties in the UK.
However, since the mansion tax was first
mooted, figures of between 35,000 and
74,000 have variously been put forward by
interested parties.
Helpfully, we now have the official estimate.
David Gauke MP confirmed in the House of
Commons that “our assessment…is that there
are 55,000 properties worth more than £2m in
the country. We have the finest minds in the
Treasury working on this… ”. 4
This same estimate was confirmed in
response to a series of questions raised by
Lord Oakeshott of Seagrove Bay during
House of Lord’s Questions on 25 July 2013. 5
We made enquiries of HM Treasury to review
the details of their calculation. While we
were not permitted access to review the
research, for the purposes of this note we
have assumed the Treasury’s assessment to
be accurate and we have adopted 55,000 as
the total number of £2m+ properties
in the UK.
Step 2: What is the average
value of a £2m+ property?
There are two official sources which can
provide an estimate of the average value of
the 55,000 £2m+ properties.
First, HM Revenue & Customs produces
an annual summary of residential property
transactions by price band. The most recent
data for 2012 reveals that there were 3,280
sales of £2m+ properties, with a total value
of £16.75bn. The average value of last year’s
transactions was therefore £5.1m. 6
Second, the Land Registry publishes its own
data on residential property transactions.
http://www.ft.com/cms/s/0/22cb5388-a6b4-11de-bd14-00144feabdc0.html#axzz2bl5Xntq8
3
Hansard 1 July 2013, Columns 648-650
2
Liberal Democrat Manifesto 2010
Hansard 1 July 2013, Column 650
4

3. AN ANALYSIS OF PROPOSALS FOR A MANSION TAX september 2013
We have assessed their Price Paid Dataset
for all £2m+ properties for the 12 months to
June 2013. These 1,661 transactions have a
mean value of £3.6m.
There are several reasons for the differences
in both average prices and sample size.
The Land Registry’s Price Paid Dataset
generally under-reports the number of high
value residential sales. One key reason for this
relates to the fact that a sizable portion of high
priced houses often come with a large area
of land, and this land element means the sale
is not included in the strict definition of the
residential Price Paid Dataset.
These missing sales provide at least one
explanation for the difference in average value
between the HRMC and Land Registry average
values. In most cases landed properties
will have the value of the house, land and
associated property treated as a linked
transaction and will therefore be included in
the above HMRC figures as an aggregate of
residential and “non-residential” values.
The Land Registry information removes these
transactions and reports a more accurate net
“residential” value. This factor points towards
the Land Registry’s lower average value figure
as being more appropriate for the purposes of
our calculation.
Before we conclude on this point it is worth
noting that there is also a tendency for high
value sales in London to be missing from
the Land Registry’s Price Paid Dataset. For
this reason we have reviewed both datasets
together with additional market sources and
have concluded on a figure of £4.4m as the
average value for a £2m+ property in the
UK, and have adopted this figure in this paper.
Step 3: How many
properties will be exempted?
Details of potential exemptions to the tax do
not appear to have been worked up by either
Labour or the Liberal Democrats. However we
did get an insight into Labour thinking from
Chris Leslie MP, who confirmed in the House
of Commons that the list of exceptions to
the recently introduced Annual Tax on
Enveloped Dwellings (ATED) “…may well serve
as a guide as to how a mansion tax could work
in future”.
7
The exemptions for the ATED are fairly wide
ranging and include those properties owned
5
Hansard 25 July 2013, Column WA240
6
however, changes to the behaviour of owners
could have further unforeseen consequences
for overall tax take.
and used by charities or social housing
providers, farmhouses and some properties
used by businesses to house employees.
More significantly the list of exemptions
includes properties rented to third parties.
Will purchasers reduce their bids for £2m+
property and would prices fall? They
might do, and if they did it would cause
a substantial problem for the taxman.
While a fall in value would be considered
irritating for home owners, the structure
of the tax means that a fall of say 5% in
average £2m+ property values would have
a disproportionate impact on tax revenue
reducing the tax take by 9%.
Removing exempt properties will obviously
reduce the number of chargeable properties
and the associated tax take, potentially
significantly. Without a final list of
exemptions it is an impossible task to
assess the significance of this issue.
Step 4: Estimating the
annual receipts from a
mansion tax
In figure 1 we have set out our conclusions on
the annual revenue generated from a mansion
tax, taking into account the assumptions
made above. Our conclusion is that the
proposed threshold and tax rate would
deliver a gross annual receipt of £1.3bn,
24% below the Liberal Democrat estimate
of £1.7bn and 35% below Labour’s £2bn
estimate. This represents an average annual
payment of £23,595 per property.
As noted above, our estimate excludes
the impact of exemptions and the cost of
collection, which could have a significant
negative impact on revenue.
There are two further issues which will have an
impact on the final tax take; the behaviour of
owners and purchasers.
How would owners react to the tax? Would
they look to split properties into multiple
smaller units? The temptation for a cash poor
owner of a £4m property to create two £2m
units would be fairly strong. As we note below
Step 5: Conclusion – how
do you raise £1.7bn or
£2bn annually from a
mansion tax?
It is clear from our investigation of official
data that a £2m threshold is too high to
deliver a tax take of £1.7bn, let alone £2bn. In
table 1 we provide an analysis which points
towards a threshold of £1.5m in order to
reach the Liberal Democrats £1.7bn target,
and £1.25m to reach Labour’s £2bn target.
The main issues informing the above
assessment include the estimate of the
number of £2m+ properties and their average
value. If either turn out to be too low, then
obviously tax take would rise. But note that
we have set out a gross position. Even if
the gross tax take were to exceed £1.3bn,
the impact of exemptions, valuation shifts,
changes to owner behaviour and the cost of
collection and valuation would be need to
be accounted for and would contribute to a
lower net tax take.
Figure 1
Mansion tax thresholds and potential gross tax take, split by value band
£2m threshold
£1.5m threshold
£1.25m threshold
Properties Gross tax take
Properties Gross tax take
Properties Gross tax take
(£) (£)
(£)
Sub-£2m
-
-
44,500
86,750,000
84,500
224,160,000
£2m-£3m
24,200
98,450,000
24,200
219,450,000
24,200
279,950,000
£3m-£4m
11,000
155,920,000
11,000
210,920,000
11,000
238,420,000
£4m-£5m
7,150
171,700,000
7,150
207,450,000
7,150
225,320,000
£5m-£10m
8,800
393,890,000
8,800
437,890,000
8,800
459,890,000
£10m+
3,850
477,750,000
3,850
497,000,000
3,850
506,630,000
55,000
1,297,710,000
All
99,500 1,659,460,000
139,500 1,934,370,000
Source: night Frank Residential Research
K
http://www.hmrc.gov.uk/statistics/transactions/annual-transactions.pdf, Table 3
7
Hansard, 1 July 2013, Column 673
3

4. AN ANALYSIS OF PROPOSALS FOR A MANSION TAX september 2013
What do
mansions
look like, and
where do you
find them?
As Stephen Williams MP notes
on the opposite page, there
are parts of the UK where a
£2m property could be fairly
described as a mansion.
However in many areas,
especially those where most
£2m properties are located,
they can be anything but.
In the following graphic we
confirm the distribution of
£2m+ properties, by size,
type and location.
4
Forecasts for £2m+ properties in 10 and 25 years time assume
no indexation in the £2m threshold (see figure 6 for full analysis).

5. AN ANALYSIS OF PROPOSALS FOR A MANSION TAX september 2013
Parliamentary
Constituency
REGION
Kensington
Chelsea and Fulham
Cities of London Westminster
Westminster North
Hampstead and Kilburn
Esher and Walton
Richmond Park
Wimbledon
Finchley and Golders Green
Holborn and St. Pancras
Runnymede and Weybridge
Putney
Beaconsfield
Hornsey and Wood Green
Hammersmith
Tooting
Windsor
Battersea
Poole
Sevenoaks
Hitchin and Harpenden
Chesham and Amersham
Islington South and Finsbury
Oxford West and Abingdon
Brentford and Isleworth
Twickenham
Reigate
Hertsmere
Chipping Barnet
Altrincham and Sale West
London
London
London
London
London
South East
London
London
London
London
South East
London
South East
London
London
London
South East
London
South West
South East
East of England
South East
London
South East
London
London
South East
East of England
London
North West
Local Authority
REGION
Kensington and Chelsea
City of Westminster
Camden
Elmbridge
Hammersmith and Fulham
Wandsworth
Barnet
Richmond upon Thames
Merton
Haringey
Windsor and Maidenhead
South Bucks
Runnymede
Poole
Sevenoaks
Islington
St. Albans
Chiltern
Kingston upon Thames
Guildford
Southwark
Hounslow
Reigate and Banstead
Hertsmere
Brent
Trafford
Waverley
Ealing
Oxford
Lambeth
London
London
London
South East
London
London
London
London
London
London
South East
South East
South East
South West
South East
London
East of England
South East
London
South East
London
London
South East
East of England
London
North West
South East
London
South East
London
Source: Knight Frank Residential Research
Source: Knight Frank Residential Research
£2M+
PROPERTIES
% OF ALL UK
£2M+ PROPERTIES
7,675
5,824
5,329
2,870
2,671
2,277
1,786
1,700
1,622
1,594
1,053
953
702
647
589
571
569
567
541
484
446
446
390
380
361
354
351
350
335
332
14.0%
10.6%
9.7%
5.2%
4.9%
4.1%
3.2%
3.1%
2.9%
2.9%
1.9%
1.7%
1.3%
1.2%
1.1%
1.0%
1.0%
1.0%
1.0%
0.9%
0.8%
0.8%
0.7%
0.7%
0.7%
0.6%
0.6%
0.6%
0.6%
0.6%
£2M+
PROPERTIES
% OF ALL UK
£2M+ PROPERTIES
11,955
8,119
3,973
2,746
2,103
2,078
2,073
1,839
1,696
646
625
597
578
540
502
495
482
445
429
426
396
361
350
349
340
332
331
315
312
297
21.7%
14.8%
7.2%
5.0%
3.8%
3.8%
3.8%
3.3%
3.1%
1.2%
1.1%
1.1%
1.1%
1.0%
0.9%
0.9%
0.9%
0.8%
0.8%
0.8%
0.7%
0.7%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.6%
0.5%
“ he mansion tax, as
T
the name suggests, is
a tax on mansions. If
a farmhouse was of
mansion proportions
and was valued at more
than £2m, it would fall
within the scope of a
mansion tax.”
Stephen Williams MP
8 Hansard, 17 Apr 2013, Column 349
8
5

6. AN ANALYSIS OF PROPOSALS FOR A MANSION TAX september 2013
Taxing issues
The debate around the mansion tax over the past four
years often seems to have generated more heat than
light. This is unfortunate, as the proposal raises key
practical questions which are in need of an analytical
approach. The following briefing has been designed to
fill the knowledge gap.
Why a mansion tax?
“ ithout indexation, all
W
houses currently worth
more than £539,000
would be paying a
mansion tax 25 years
from now, meaning that
rather than covering
55,000 properties, the
tax would extend to
cover around 775,500
properties by 2038.”
There is a view in some political circles that
owners of expensive houses have been
underpaying their fair share of taxes. As Nick
Clegg said in a radio interview in February
this year “the underlying issue which could
not be ducked was that properties worth
tens of millions of pounds were paying the
same council tax as ordinary family homes”. 9
potentially be directed at affordable or
intermediary housing investment.
The fact that London in particular will
be the main target for the tax, with five
local authorities (Kensington Chelsea,
Westminster, Camden, Hammersmith
Fulham and Wandsworth) contributing
well over half of all potential proceeds,
highlights the growing trend for Londoners
to contribute more in tax than is returned
in local spending, an issue raised by the
So why not reform
council tax?
London Finance Commission. 10
If a tax is thought to be flawed it might
be better to fix it rather than create a new
tax. However, one argument in favour of
Will a mansion tax
be extended?
the mansion tax is that a reform of
Our calculations earlier in this report, point to
the council tax is too complex and too
the real threat of the mansion tax threshold
expensive. This seems surprising, bearing
being lowered substantially in order to meet
in mind the Welsh Assembly completed
stated revenue targets.
the same exercise in 2005 by adding a
new council tax “band I” for higher value
property owners in Wales. A detailed
reading of recent commentary suggests
that the real problem with a reform of
council tax is that increased revenue
will flow to local government, whereas
proponents of the mansion tax are looking
to raise revenue centrally.
Even if the threshold is not lowered, there is
another route for the extension of the tax.
Bearing in mind the proposed threshold has
remained at £2m since 2009 (since when the
UK has seen close to 10% price growth) it
seems a fair assumption that the threshold
would not be raised in line with future house
price inflation.
Over the past 10 years house prices have
Wouldn’t a local tax
be better?
risen by 69%. Assuming a similar rate of
growth in the future, all houses worth more
than £1,185,000 today would be paying a
mansion tax 10 years from now, meaning that
The fact that higher-valued properties are
illustrates, over the next 25 years, the same
properties) points to a strong argument
time frame as a new mortgage term, the
for a local solution. Local authorities in
total number of properties covered by the
these areas have made the point that it is
mansion tax would rise to 775,500 – being
precisely these regions where housing
all properties currently valued at or above
affordability is most stretched where
£540,000. Once you understand this process
additional council tax revenue could
9
triple from 55,000 to 157,300. As figure 6
South East of England (86.4% of all £2m+
6
the number of homes covered would nearly
so concentrated in London and the
you begin to see the tax’s political appeal.
http://www.bbc.co.uk/news/uk-politics-21523314
10
http://www.london.gov.uk/sites/default/files/Raising%20the%20capital_0.pdf

7. AN ANALYSIS OF PROPOSALS FOR A MANSION TAX september 2013
Will the UK’s built
heritage suffer?
We mentioned earlier that some owners
High value properties are disproportionally
likely to be listed by English Heritage,
suggesting that they are more likely to form
There is a potentially larger group of
part of the UK’s built heritage. Figure 5
conservatory, a swimming pool or a garden
confirms that, while at most around 1% to
makeover risks adding significant value to a
2% of sub-£2m residential properties in the
property – it would also add to the owner’s
UK are listed, the figure rises rapidly to more
mansion tax liability.
might be persuaded to divide properties
into smaller units to reduce their liability.
than 31% of all £10m+ properties. Overall
16% of £2m+ properties are listed.
The imposition of an average annual tax
charge of £23,595 sits awkwardly with the
obligation for owners of listed buildings to
maintain and protect their properties for
future generations to enjoy. Exempting all
listed buildings would reduce the potential
tax take by nearly a quarter to around
owners who might decide to put their home
improvements on hold. If an extension, a
Calculating the impact of deferred
improvements on lost income taxes,
VAT payments and more broadly weaker
economic activity from reduced demand
for builders, architects, pool installation and
maintenance companies, garden supply
firms etc – would be a challenge but would
be necessary to give a true “net” position
on the total tax take.
£0.98bn.
Will the economy and
tax revenues suffer
from a lack of home
improvements?
What to do with
“cash-poor but
equity-rich owners”?
The unusual nature of the proposed
mansion tax means that there is no
transaction revenue or income stream to
Figure 5
tax. This creates a problem for people with
Listed buildings by price band
% of all residential properties listed Grade II
or above
On the face of it this is a neat solution.
However, depending on the structure of the
provision it could create a significant increase in
overall tax charge. Assuming an interest rate of
5%, you only need to defer payment 20 years
and the final tax charge would be 65% higher
than for those able to pay annually.
Is the mansion tax fair?
Rather than adding more words to the
thousands already written on the fairness
or otherwise of a mansion tax, we thought
we would end by considering the “lifetime”
tax position for a purchaser who is fortunate
enough to be able to buy a £3m family home
from earned income.
Income tax and NI paid on
the £3,000,000 of net income
required to buy the property
£2,660,000
Stamp duty paid on the
purchase (7% on £3,000,000)
£210,000
Annual mansion tax for 35 years
(1% on £1,000,000)
£350,000
Inheritance tax on sale £1,070,000
proceeds (40% on £2,675,000)
Total tax take on lifetime
ownership of £3,000,000
property
£4,290,000
low incomes who own valuable properties.
Not wanting to promote forced evictions,
the Liberal Democrat response has been to
35%
suggest that older owners would be able to
30%
paid from their estate when they die. 11
roll-up the annual tax, which would then be
25%
Figure 6
20%
When does your home become a “mansion”?
The impact of “fiscal drag” on the number of properties affected by a mansion tax
31.4%
15%
24.5%
10%
15.5%
5%
Introduction year
All £2m+
£10m+
£5m-£10m
£2m-£5m
Source: night Frank Residential Research,
K
English Heritage
11
Current value of
properties caught by a
static £2m threshold
Number of properties
caught by a static
£2m threshold
55,000
0%
£2,000,000
5 years
1.9%
Sub £2m
0%
12.1%
Number of years
Cumulative house
following the introduction
price growth*
of the mansion tax
30%
£1,540,000
95,200
10 years
69%
£1,185,000
157,300
15 years
120%
£910,000
240,900
20 years
185%
£700,000
419,200
25 years
271%
£540,000
775,500
Source: night Frank Residential Research, Land Registry, HMRC, Nationwide
K
*Assuming the same level of future growth as seen over the past 25 years.
http://www.independent.co.uk/news/uk/politics/nick-clegg-suggests-retirees-could-defer-mansion-tax-payments-8503896.html
7

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