Monday, 12 March 2012


UPDATE: In the Budget on 21 March 2012 the Chancellor did not introduce a Mansion Tax. Instead Stamp Duty Land Tax for property sold for more than £2 million was raised from midnight that day to 7%. A 15% rate of SDLT was introduced at once from property bought by 'non-natural persons' and an annual tax will be looked at for property owned by such persons for Budget 2013. 'Non-natural persons' are entities such as trusts and corporations.

A tax on properties worth more than £2 million is possible.

A number of practical and theoretical problems have been raised. All of them can be dealt with.

That is not to say that a tax on the capital value of domestic property at any particular level is either a good or a bad idea. Nor that implementing would be easy or without causing some hardship.

But this blog shows it is possible to do it if the politicians decide to do so.

How much it would raise is bound to be speculative and would depend on the level at which the tax begins and the rate of tax that is levied above that level. It also depends crucially on how many properties are worth more than the taxable level. Figures seem to be unknown. 

It would also need to apply to any domestic property located in the UK regardless of whether it was owned by an individual, a trust, a company, a charity, a church or any other entity and wherever that owner was located in the world.

I. Valuation
It would take years to value all properties with a view to levying such a tax.

Make homeowners responsible for valuing their own property unless they had a reasonable belief that any property they owned was not worth, say, 90% of the starting level – which would be £1.8 million for a tax that began at £2 million.

If the value exceeded the limit then the homeowner would have a duty to inform HMRC.

When a property was sold pre or post mortem the tax could be assessed and collected retrospectively at the time of sale or after death from the estate.

In future, the vendor's solicitor would have the obligation of informing HMRC and could collect any tax due to the point of sale. 

Placing the obligation to assess and pay the tax on individuals is nothing new. If a home or second home is sold the vendor has the duty to see if Capital Gains Tax is due and, if so, to let the Revenue know. 

When a property is sold the buyer's solicitor is obliged to assess the stamp duty land tax and pass it to the Revenue.

If someone is paid money of any sort the onus is on them to decide if it is taxable and, if so, to inform the Revenue by 31 October in the following tax year and, if necessary, to complete a self-assessment form.

II. Unable to pay
Many individuals who live in homes worth more than £2 million bought them for a great deal less and are now elderly on limited incomes. They may have no money or other assets to sell to pay the tax due each year.

The owner could borrow commercially against the value of the property with the debt and interest being paid when they died or sold.

Alternatively the tax could simply accrue as a charge to the state against the property and be paid when it was sold or after the owner's death. It would be up to the Government whether such a scheme charged  interest or was interest free.


A similar scheme is used to recover nursing home fees if they are owed by someone who has a home which is not lived in by a spouse or partner or a relative over 60. If the home is not sold then the local authority will pay the fees and then take a charge against the property. The debt is interest free until shortly after the person dies.

III. Double taxation
Homes are bought out of taxed income. Therefore it is wrong to tax the value of the home again.

While it is true now that homes are bought out of taxed income, it has not always been so. From 1969 people guying a home on a mortgage could claim tax relief on the interest up to certain limits. It was called MIRAS and was only finally abolished on 6 April 2000. Some steps to phase it out were taken in 1988 but it continued for existing loans until 2000.

Treasury estimates at the time claimed that 11 million homes were being bought under MIRAS. So in fact homes bought up to 2000 on a mortgage were at least partly paid for out of untaxed income. Taxing the capital value would therefore be the first time that much of that money had been taxed.

There are many other occasions when taxes bite twice on the same money. Three examples:- 
Income is taxed and that income is used to buy items including VAT. 
Cash is put into savings accounts out of taxed income and the interest they earn is taxed. 
Inheritance tax applies to a whole estate regardless of how often the money that makes it up has been taxed.

IV. Fairness
Many elderly people whose home has been in the family for many years believe that the increase in value is theirs and it is wrong to tax it retrospectively.

Many people with what is often called a ‘family home’ have benefited from a huge windfall gain in the value of their property.

Although it is undoubtedly true in most cases that the owner worked hard to pay the mortgage on the original loan. It is also inevitably true that the property is now worth in real terms many times what they paid for it. This windfall gain is entirely unrelated to the merits or not of the owner and the difficulties or not they suffered to acquire that asset. It is largely die to the way the UK economy has functioned over the last 50 years. 

The gain is one they will often not use themselves – and that is particularly true for very large gains. It will normally pass to their children or other heirs. And there is nothing inherently unfair about society taking back a small amount of this windfall gain by way of a capital tax any more than it is wrong to tax inheritance.

Capital Transfer Tax was introduced in 1974 to tax any large transfers of capital and was replaced in 1988 with Inheritance Tax. Both taxes take money from assets which may well have been paid for through hard work and diligence.

In many other parts of the world, including many countries in Europe, property is subject to an annual wealth tax. And in many other countries the value of the home you live in is not exempt from capital gains tax.

Thursday, 1 March 2012


The claim by 537 company directors in today’s Telegraph that there is an effective tax rate of 58% on extra earnings over £150,000 is wrong.

Let me explain why.

The letter calls on the Chancellor to end the 50p in the pound additional rate of income tax. The rate “puts wealth creators in a very awkward position” and scrapping it would show that the Chancellor wanted “to celebrate British entrepreneurialism, stimulate industry and contribute to…growth.”

But I was struck by this phrase.

“The tax, which is in effect a 58p tax after national insurance is taken into account”

How did they get to 58p?

A number of tweeps and one firm of accountants came to my aid.

One identified this paragraph in Wikipedia.

“After consideration of employer and employee National Insurance contributions, the effective marginal top rate for 2011-12 is 58%: that is, to pay an employee £1,000 gross costs the employer £1,138 and the employee receives £480 after deductions.

But, like much Wiki-info, it needs care when it is used.

Here is how the Wiki-sum goes.

If an employee earns more than £150,000 then to get another £480 into their pocket you do indeed need to pay him or her £1000. That is subject to 50% tax and 2% NI leaving £480. But the employer also has to pay the employer’s National Insurance which is 13.8% or £138.

So out of a total cost to the employer of £1138 the employee gets just £480. Subtract one from the other and tax of £1138 - £480 = £658 has been paid. So the ‘rate’ of tax is £658 / £1138 = 57.8% which Wiki rounds up to 58%.

But hang on a minute. These are large companies paying full-rate corporation tax on their profits. The whole cost of paying employees – their gross pay and the employer’s National Insurance charge – is deductible from profits.

So in fact the gross cost of paying someone £1000 is reduced by the corporation tax saved. Corporation tax is currently 26% and falls to 25% from 2012/13. The total extra pay bill of £1138 reduces corporation tax by £1138 x 25% = £284.50. So the net cost to the employer is £1138 - £284.50 = £853.50.

The employee gets £480 in their pocket. And the amount that has disappeared in tax is £853.50 - £480 = £373.50. So the tax ‘rate’ is £373.50 / £853.50 = 43.8%, which rounds up to 44% of the total costs.

Assuming the employer makes a profit and pays corporation tax.

And if it doesn’t perhaps it shouldn’t be paying its directors more than £150,000 a year.

If these guys (and 89% of them ARE guys) are partners then there is no employer’s National Insurance to pay so the effective tax on the extra £1000 is just 52% which they pay. So 58% is simply wrong for partners. And that is the effective marginal tax rate for employees too as far as the employee is concerned.

If they are directors and earning dividends then the extra tax on paying another £1000 in dividends is £361.10 or 36%. There is no national insurance paid by them or the firm. So again 58% is simply wrong.

If the employees are in a final salary scheme then employer’s National Insurance is 10.4% not 13.8% and effective tax is 42%, not 58%.

If the firm is small then corporation tax is 20% not 25%. Effective tax is 46% (contracted out) or 47% (not contracted out) so 58% wrong for them too.

The only occasion when the net tax take from the grossed up pay would be almost 58% is if the person earning over £150,000 is an employee who is not contracted out of state second pension, and the company makes no profit. 

All figures are given at announced 2012/13 rates and may change in the Budget.