Libdems' plan to surtax houses worth over £1 mn

Steady on, says Cable, as big home tax unravels Lib Dem leaders face accusations of launching half-finished proposals

By Michael Savage, Political Correspondent The Independent Tuesday, 22 September 2009

A Liberal Democrat plan to hit the rich with a new tax on million- pound mansions began to unravel yesterday after it emerged that the plan would only be temporary, may not be applied across Britain and could hit some pensioners on low incomes.

The measure, revealed by The Independent, was a main plank of the keynote speech made yesterday by Vince Cable, the party's Treasury spokesman, to the Liberal Democrat conference in Bournemouth. He said that the new levy was designed to hit the likes of the Chelsea Football Club owner, Roman Abramovich, and the London-based steel magnate Lakshmi Mittal. "Under our unfair council tax, Messrs Mittal and Abramovich, in their £30m palaces, pay the same as a band H family home, though their properties may be worth 40 or 50 times as much," he said.

Introducing the levy would, the Liberal Democrats say, allow the Government to take four million low earners out of income tax altogether by raising the threshold for the tax to £10,000. About

But the plans began to unravel on the day. Senior party figures had to admit that the measure would only be temporary while plans for a local income tax were tested. Aides would only say that the levy would last for "several years".

It also emerged that the party would be unlikely to implement the policy in Scotland. Under devolved powers, the new tax would need to be approved by Holyrood. Mr Cable conceded that Liberal Democrats in Scotland would have to "make the case" for the policy. "It would have to be approved by the Scottish Parliament," he said. "That is a choice for Scotland."

There were also suspicions that the measure would become a new inheritance tax by stealth, as Mr Cable admitted that those on a small income liable to pay the tax, such as pensioners in larger houses, could have the payment deducted from the value of their estate. "These problems already exist under the current system," he said. "We are not inventing a new problem." Despite the questions, aides insisted that Mr Cable had discussed the policy with frontbench colleagues before it was announced.

The Liberal Democrats immediately faced accusations of launching a half-finished tax plan. Paul Smith, chief executive of Haart estate agents, said the new tax would be unworkable. "This level of taxation is absurd and will only lead to disagreements about values," he said.

Sarah McCarthy-Fry, Exchequer Secretary to the Treasury, accused Mr Cable of performing a U-turn. "They've spent years arguing to replace council tax with more income tax because they don't believe in taxation being linked to homes," she said. "Now they've managed to make the centrepiece of their conference exactly the opposite."

In his speech to delegates, Mr Cable said the Government had been "living beyond its means". He said both Labour and the Tories wanted to go back to "business as usual" in the City, and criticised the Prime Minster for failing to take on the financial sector. He pledged that the Liberal Democrats would force anyone who earned more than the Prime Minister to disclose full details of their pay, bonuses and perks.

He said he could not rule out further tax increases. "It would be dishonest and unbelievable for me to say that taxes overall should never rise," he said. "But the Liberal Democrats' starting position is to aim for fairer not higher taxes." He also had a tough message for public sector workers, arguing that their wages should be frozen as part of the cost cutting drive, saving £2.4bn a year.

Shaky foundations Lib Dems' 'mansion tax'

What are the plans? An annual 0.5 per cent tax on homes worth over £1m.

What went wrong? The Lib Dems admitted yesterday that it would only be put in place temporarily and might prove impossible to introduce in Scotland ? the levy would need approval from the Scottish Parliament.

Is the policy regressive? As it taxes property, rather than income, it can be. While a pensioner's house may have accrued a lot of value over time, they may be on a low income.

So what about those pensioners? Those on council tax benefit will be spared the levy. Others would have it deducted from the value of their estate when they die, like an inheritance tax.

What went wrong is that he forgot that in many parts of London (including his own constituency) it is next to impossible to buy a family house for much under a million, and that ordinary middle class families have to stretch their income to breaking point to buy a suitable house

Owing a million pound house does not necessarily mean that you are rich, it could just meant that you owe an awful lot of money to the Bank

tim

IME most "ordinary middle class" families can't afford a million pound house, but I don't live in London.

Unless the mortgage was obtained fraudulently they would need a pretty large income to get such a loan and/or a huge deposit.

Trouble is virtually no-one believes that /they/ are rich. I know quite a few people who are much richer than me and they all moan about a lack of money.

The main problem with such a tax rule IMHO is assesing the value of houses that have not been sold in recent times. I had thought the LDs wanted to move away from property taxation so I am surprized that they are proposing a new one.

Mark gurgled happily, sounding much like they were saying:

If you were to pay the asking price, you'd be looking at £1,375/year for this proposed tax. Not a huge amount in the grand scheme of things, but equally not exactly going to be popular... It's somewhere around 60% of the Band F/G (which that road seems to fall mainly into) council tax in Haringey.

ITYF that few people are first-time buyers of £1m houses. They've got to that price range by being fortunate enough to build substantial equity in previous houses on the back of the massive price rises over the last decade or two - together with substantial mortgages...

Quite. What happened to the local income tax instead of council tax?

It might be the size of a middle-class family home but certainly not the price IMHO.

I'd consider paying £1,375 extra tax a lot, but then I'd need a much higher income to be able to afford such a house.

It could easy be a family's second house. You'd need to have made a lot on the first to gain a large enough deposit. Anyway it's a myth that rising house prices make it easier to move up the ladder. It actually makes it harder since it is the price difference that determines how much extra mortgage is needed. And the price difference increases as the prices rise BTDTGTTS.

"Mark" wrote

Not necessarily!! Let's suppose you can only get a mortgage upto 90%, and have (say) a 10K deposit...

You buy a 100K house with a 90K mortgage. Let's say house prices now go up by 20%, so that you now have a

You can now get a 300K house with a 270K mortgage. There - the rising house prices *did* make it easier to move up the ladder!

"Mark" wrote

But you might find that your limiting factor is your deposit, rather than the mortgage you can afford (see above).

"Mark" wrote

"Tim" gurgled happily, sounding much like they were saying:

Been There Done That Got The T-Shirt.

It's more likely to be their forth or fifth

tim

No. Because the 300K house has also gone up 20%. If prices had remained the same then the 300K house would have sold for £250K. Therefore, in your example, you would only need a £240K mortgage. You would have a smaller deposit which could make your mortgage more expensive, however.

Possibly.

"Mark" wrote

Yep, so you've traded-up from a house that cost 100K previously to one that cost 250K previously (ie from one that's 120K now to one that's 300K now).

Don't you think that is "moving up the ladder"?

"Mark" wrote

... which you wouldn't get, because that's 96% and you can only get a (max) 90% mortgage. The most expensive house you could get was

"Mark" wrote

Or, rather, *non-existent* in the example - because the example says "suppose you can only get a mortgage upto 90%".

Thus the rising house prices *would* help you move up the housing ladder!

You haven't read my last post properly. Rising house prices make it more expensive to move "up the ladder".

In your example, given the low equity, then it could make it "easier" if otherwise a mortgage is not available. Given higher equity or a market where near 100% mortgages are available then this is not longer true.

At that price, yes. However I would not want to move 5 times in order to get a house like that.

That's not relevant to Tim's point, which is that if the price of your existing house goes up by £20k, then your equity goes up by that same amount. In the case of his example, your equity triples in value and therefore the value of the house you can afford also triples (provided your deposit is the only limiting factor, so that you can still get a 90% loan and your income can cope with interest payments on a three times bigger loan).

That's rather the point. The key assumption of Tim's illustration (of how price rises *can* make it easier to "climb the ladder") is that you would still require a 10% deposit. You would therefore need a £25k deposit to move up into the £250k house, and if all you could put towards that is your £10k equity, then you couldn't afford it.

Quite. The flaw (in practical terms) in Tim's artificial example is that if you could have afforded the payments on the bigger loan all along, then you should have been able to save up for a bigger next-time deposit, and not have needed to rely on price rises to beef up your equity.

Mark gurgled happily, sounding much like they were saying:

You're forgetting something.

Over the years, you've paid off a chunk of that initial mortgage, so you have more equity in the house you're moving from than merely your initial deposit plus the increase in value.

"Mark" wrote

I was replying to your initial post that said "... it's a myth that rising house prices make it easier to move up the ladder. It actually makes it harder..."

Your previous post (see above) then said "No..." to my comment above, which was in relation to being "easy/hard" not to how expensive it would be.

Do you now agree that your first statement was incorrect?

"Ronald Raygun" wrote

Not necessarily!

If interest rates were much lower than the house price rises, then the extra savings for "bigger next-time deposit" might not have been as much as the increased equity.

Also, earnings might increase only just before the "move up the rung" - rather than having been higher throughout...

Only if you have a repayment mortgage. Even then, near the beginning of the mortgage, you are paying mostly interest. Therefore your "deposit" will have only appreciate by a small amount. It is unlikely, unless house prices rise slowly or not at all, that this would compensate you for the increase in price in the property you are buying.

Mark gurgled happily, sounding much like they were saying:

Or, on moving, you've cashed in an endowment - or you've had a mortgage long enough that an endowment's matured.

Depends what timescale we're looking at. Few people scale the housing ladder in a handful of years - we'd typically be looking at 15-20 or so, minimum, I'd have thought.

I'm not sure I see what bearing you think interest rates have on this. I was proposing that the bulk of the increase in savings would come from new spare income, not from interest boosting those savings.

Besides, high house price rises would beef up your equity whether you relied on it or not. Or did you mean to write "If interest rates were much lower than the house price rises *would have been*"?

And another "besides": If interest rates were low, and indeed went down, this would let you divert more income from servicing interest on the existing loan to beefing up your savings.

I would have thought that finding yourself able to afford three times bigger mortgage payments isn't something likely to happen to many people overnight. But I concede that it's possible that it might happen occasionally now and then here and there, in a blue moon.