Bill Jamieson: Scope for mayhem with mansion tax

Would a separate Scottish Parliament vote for a mansion tax similar to that now being touted again for the UK?

The mansion tax proposal, revived by Deputy Prime Minister Nick Clegg last week, ticks big boxes north  of the Border.

First, it hits the central London Belgravia Belt where foreign investors and bonus-swollen investment bankers have driven property prices to astronomical levels. The gap between average prices in central London and Scotland has seldom been wider. “They can well afford it” might be a typical Scot’s response.

And such a tax is unlikely  to affect Scotland much.  The odd fund manager in Edinburgh’s Barnton or lawyer in Bearsden may have their lifestyles clipped a little by an annual levy on their £2 million piles. But elsewhere in Scotland few would have to worry. The £2m threshold is also well above the level that would catch members of the Holyrood political class, so can be advocated with impunity.

As for the Conservatives – and particularly the Scottish Conservatives – it would be politically difficult for them to oppose. There would be few votes to garner – and many to lose: it draws the party into a dangerous trap of jaundiced perception, with Conservatives seen to be the defenders of the rich and privileged. As James O’Shaughnessy, David Cameron’s former director of policy, points out, those who associate Conservatives with what he calls the “dreaded posh family in front of a mansion” when asked to choose the picture that best represents the Tories, would have all their prejudices confirmed.

So is a Scottish mansion tax a done deal? The Pavlovian response of most MSPs would be to grab the opportunity of a painless extra tax while it’s going. Why, after all, should Scottish politicians deny themselves an additional source of tax enjoyed by the English down south? And why should Scotland allow itself to become the playground of shady oligarchs, wealthy show-offs and tax-dodging Belgravia refugees?

Were a tax to hit all these buttons it would be an extraordinary boon indeed. But it may be doomed to fail by virtue of the expectations heaped upon it.

A £2m mansion tax would be likely to raise only a trivial amount in income – UK-wide, an estimated £1.7 billion on just 74,000 houses. Scotland would struggle to raise a tenth of this amount. It would not be worth the administrative and valuation hassle.

Much, of course, would depend on how a “mansion” is defined for tax purposes. Here in Scotland, owners or operators of rural estates may be deemed liable if the house is seen as an integral part of the asset. Such estates, attracting visitors for fishing and shooting, make a significant contribution to Scotland’s rural economy. If estates are not to be so taxed, it creates a loophole. And if the tax is applicable, Scotland may lose more in revenue than it hopes to gain.

An additional problem is that the debate on a mansion tax is often conducted without reference to the existing tax environment.  As Lucian Cook, director  of Savills research, points  out: “Contrary to popular perceptions, top-end property owners already make a disproportionately high contribution to tax revenues.”

The UK already has by far the highest property tax  take of any OECD country. Property taxes contribute 4.2 per cent of GDP compared with the OECD average of 1.8 per cent. The highest 1.6 per cent of residential property sales yielded £1.2bn in 2010, the equivalent of 26 per cent of all stamp duty receipts.

The top 0.7 per cent of housing stock held at death contributes 36 per cent of inheritance tax receipts from residential property. And the “non-dom” levy, which will rise from £30,000 to £50,000 a year, already collects revenue from owners of  high value property  domiciled overseas.

Savills estimates that a stamp duty increase from  4 per cent to 5 per cent  on £1m-plus properties introduced in April 2011 will have added around £290m  of additional tax, and that increasing the rate from  5 per cent to 7 per cent for properties over £2m will  add a further £370m.

How ironic that a mansion tax should be advocated as a means to raise revenue when a rise in council tax would do the job more effectively and efficiently. But the reason  that a mansion tax is on  the agenda at all is because council tax hikes have become a political no-no.

To these objections must be added the standard concerns. Over time, there is the silent, insidious creep – and often gallop – of inflation. It might seem fanciful to suggest that people could be relentlessly drawn nearer to the £2m threshold by the rise in value of their homes. But inflation transformed the housing market over the three decades to 2007, driving prices to unimaginable levels. The average price of a detached house is now six times higher than it was in 1982.

Moreover, once such a tax is on the statute book, the threshold level would be a simple matter to adjust.  It is not hard to envisage  the arguments for a  cash-strapped chancellor proposing a reduction in  the threshold to £1.5m.  And the costs and activities  of the state are constantly expanding.

Even if, despite all these objections, a Scottish mansion tax may still have appeal to an independent parliament, it is worth a counter-intuitive look at the gains that may accrue by not following the rest of the UK.

By offering a property environment that is relatively less severe in its tax arrangements, Scotland would stand to enjoy some of the overseas money currently pouring into London and the south-east.

While the UK market has traditionally moved in a delayed-reaction cycle, with the metropolitan area leading the advance and the rest of the UK catching up after an interval, this may not be so pronounced this time around given the financial and business pull of London as a global metropolis. We may well need a competitive edge to avoid stagnation and falling further behind.

The absence of a mansion tax or the threat of one may also be an incentive both for wealthy people to consider a property purchase in Scotland or to help attract leading business figures from overseas. And the enhanced revenue and activity that a more active property market at the top end would bring could more than compensate for the potential mansion tax revenue lost. We would be better off without it.

For these reasons, the debate on the merits and drawbacks of a Scottish mansion tax deserves to  be more balanced than it currently is, and MSPs discouraged from leaping to the obvious conclusion that this is a costless tax that will have no ill consequences. If the intended consequences aren’t already daunting, beware the killer punch  from the unintended ones.