Mansion Tax – How will it affect the market in Prime Central London?

With just 55 days to go until the General Election, Labour’s proposed mansion tax is coming under intense scrutiny.

Those involved in the Prime Central London (PCL) markets are paying especially close attention, as a large number of properties will be affected if the legislation comes into place. The tax would be levied on properties worth £2 million, which Labour has calculated would raise £1.7 billion towards deficit reduction. The plans have been criticised by politicians and real estate market analysts alike, for many different reasons. So just why exactly is this controversial tax such a bad idea?

What the mansion tax means for properties in central London

The belief among property experts is that mansion tax will soften the market, leading to a slowdown in both the volume of transactions and the average sale price.

This was certainly the case immediately following the rise of Stamp Duty on properties over £2 million in 2012. Sales of homes worth between £2-2.5 million fell by 32 per cent in PCL, after the rate of Stamp Duty was raised to 7 per cent. There are also fears that further taxation will make property in Prime Central London unappealing to wealthy foreign investors; overseas investors own over 50 per cent of the houses worth over £2 million in London, and they are one of the most active investor demographics in PCL. The introduction of a mansion tax could quell interest from these buyers, something that would have a substantial, negative knock-on effect on the market.

Investors aside, homeowners with property in PCL will have to face the rate hike as well, which can be especially difficult for pensioners. Although pensioners can delay the payment of the tax until the house has changed hands, this means they are forced to make the decision of either paying the tax, or selling their homes in order to afford it. Many pensioners have lived in the area for years if not decades, and bought when property prices were lower. Rather than being rewarded with price growth and value that has accrued over the years, they would in effect be penalised by it should Mansion Tax come into effect.

Market analysts are in almost universal agreement that the introduction of the tax would cause the market to stagnate. Where PCL has enjoyed double-digit price growth in recent years, forecasts for 2015 are markedly more modest, with the average rate of growth predicated to be between zero and 2 per cent. Uncertainty surrounding the tax has left many would-be buyers and investors on the fence, hedging their bets until the verdict is out in May.

In summary, Mansion Tax would be detrimental to the property market in PCL, for buyers and sellers alike. It could cause lower-than-market valuations, reducing the number of properties valued at £2 million and more coming to market, and slow investor interest both at home and overseas.