The mansion tax announced in last week’s Budget may only ensnare 120,000 homeowners at first, but its introduction is likely to contort the entire market for family homes, property experts have warned. Thousands of homeowners who are on course to be hit with the tax of up to £7,500 a year could now be looking to sell their home and downsize to one that will not be in its scope.
More still who are just below the £2million threshold may consider moving to a cheaper home as it would only take a small amount of house price growth – or a freeze or cut in the threshold in future – for them to be hit within the next few years.
Meanwhile, owners of family homes safely out of reach of the tax could find themselves sitting in a sweet spot, enjoying increased demand both from those snubbing the top of the market and downsizers seeking to escape it and eyeing up cheaper properties.
With all these forces at work, the housing market could see new distortions – and opportunities – opening up.
Fortunately for those impacted by the mansion tax – officially called the high value council tax surcharge – or its fallout, there is time to get ahead as it will not come into force until April 2028. But you’ll have to move fast.
Here, experts tell Wealth & Personal Finance how homeowners can get on the front foot – and even profit from the mansion tax mayhem.
The mansion tax is set to completely alter the housing market when it is eventually introduced
Why will there be a downsizing deluge?
It’s easy to assume that someone living in a mansion would be wealthy enough not to be worried about a council tax surcharge.
But many of those impacted will not have huge nest eggs. They will simply have bought a family home – more than likely in London or the South East – some years ago and have seen the value of it appreciate.
The sums demanded are not small – even for those who are relatively well-off. For homes valued between £2 million and £2.5 million it will be £2,500 a year on top of their council tax bill.
For properties valued at £2.5million to £3.5 million, it’ll be an extra £3,500, between £3.5 million and £5 million it is £5,000, and for properties worth more than £5 million it is £7,500.
This tax comes on top of a deluge of others announced in the Budget that will leave those with high incomes and assets worse off.
These include a tax surcharge on savings, dividends and buy-to-let income, as well as a freeze on income tax bands and inheritance tax thresholds.
The documents released alongside the Chancellor’s Budget statement reveal that the Government is looking into a way of allowing homeowners who cannot pay upfront to defer bills, but many may not want to let such a debt build up.
Rob Hillock, of consultancy Broadstone, says the looming threat of a mansion tax will give pensioners and those approaching retirement the nudge they need to swap to a smaller home at the right time in their life. After all, many of those likely to be hit by the tax will be older homeowners who have seen the value of their property soar over decades.
‘When I speak to my clients who are approaching retirement, they often talk a lot about downsizing,’ he says. ‘But when they reach it, downsizing becomes less of a reality for them. They wonder, “Will my new house be a nicer property?” But this new tax may change that behaviour.’
The impact of this downsizing trend for owners of the most expensive houses is likely to cascade through the property market.
At the top of the market, property owners could look to move to get below the next threshold.
This could lead to what the Office for Budget Responsibility referred to last week as ‘bunching’, whereby sellers put their homes up for sale at prices just below each band boundary.
That could mean, for example, that there are vast numbers of properties for sale at £1,999,999 – just below the £2 million threshold – but very few for sale at just above that sum.
And those with homes under the threshold could see the value of their homes soar – and may in turn look to cash in and downsize.
Jonathan Stinton of Coventry Building Society, says: ‘The impact could be a lot wider. If sales of high value properties do go through, it could unleash a wave of demand for mid-priced family homes as sellers move down the ladder.
‘That surge in demand could push up prices in the middle of the market, even as the top end cools.
‘Changes aimed at the wealthiest households can end up reshaping the whole housing chain.’
Jennie Hancock, director of West Sussex buying agency Property Acquisitions, expects properties priced from £750,000 to just under £2million will see a spike in demand as a result of the tax.
She says: ‘The one silver lining is that the tax won’t come into effect until 2028, which leaves a decent window for downsizers to make their move – and I expect many will, even if they have to take a hit on the price.’
She warns that sellers should be prepared to be flexible on price as buyers may need to be lured to the table if a property is valued just above one of the four bands.
Mortgage broker David Hollingworth of London And Country Mortgages says: ‘If your home is in that £1.5 million region it’s looking like you’re in a good place.’
But Paula Higgins, of property advice website HomeOwners Alliance, warns that if you’re looking to buy to escape the tax, you may want to go for a property well below the band you’re seeking to avoid.
‘The reality is the cost of moving to a home that is under the threshold will be too great because of stamp duty charges, and you will still be at risk if the threshold stays frozen or is reduced in future years,’ she says.
Buyers may also take a keener interest in the council tax band of homes they are considering. The Government has confirmed it is only the top three bands – F, G and H – in England that will be valued to determine which properties fall above the mansion tax threshold.
Valuations will be done by the Valuation Office, which is likely to take into account the sale price of a property alongside other factors that can affect its worth, such as garden size and transport links.
Satellite imagery could also be used to ‘spy’ on the aerial view of properties as part of the valuation.
Should you downsize?
If you suspect your home will be caught out by the mansion tax and you are determined not to pay it, then downsizing is likely to be the simplest option.
However, while paying the tax could sting, for most people it is unlikely to be the most important factor when deciding where to live.
After all, most people are buying a house to be a home, rather than an investment, and what matters most is whether it is the right property and location for them.
For anyone who has been considering downsizing, however, it could be a good prompt.
Selling the family home can be painful, but can often make sense in later life if it means you have a more manageable property and garden to maintain.
Legacy planning is also a consideration, as any property that exceeds the mansion tax threshold is also likely to attract inheritance tax when the owner dies. You can pass on wealth of £325,000 free of inheritance tax – double that for a couple who are married or civil partners – and if you’re passing on a family home to direct descendants you have an additional allowance of £175,000 or £350,000 for a couple.
That means family homes worth more than £1 million attract inheritance tax when they are passed on – and some worth considerably less than that if passed on by a single person or to loved ones who are not direct descendants.
It is not easy to pass on a home that you are still living in, so downsizing tends to be one of the most straightforward options – freeing up cash that is easier to hand over and escapes inheritance tax if you live for seven years after making the gift.
Don’t procrastinate
Meirion Shaw, of The Homemover Specialist, is a downsizing expert
Although families who want to downsize have more than two years before the mansion levy kicks in, they should start the process earlier than they think – and stop procrastinating, according to downsizing expert Meirion Shaw, of The Homemover Specialist.
She says: ‘If you want to do it, you just have to get going. Don’t say, “I’ll start thinking about it in the New Year.” Think about it now, so in the spring you will have all the information you need in one place.’
Start thinking about where you want to live and what is important to you – whether that’s being near family, good transport networks or a strong community.
Buying agent Hancock says: ‘Get as much information about the area as you can. Location is everything.’
Once you’ve found your dream area, let locals know you’re on the hunt for a property, which will speed up time, Shaw adds.
‘Most people who downsize will be looking for a home in a particular village,’ she says.
‘Let people in the area know you’re looking for a property, and they can phone you when a suitable one is on sale.’
She also advises to get a survey done of your own house before starting viewings. Buyers will do their own, but getting one first will save time further along the line.
If something unexpected crops up in the buyer’s survey which you didn’t know about, they may pull out of the sale. This way, you can address any issues that could cause a hold up before putting your home on the market.
Homes above the mansion tax bands will be harder to sell, so getting your home ready is more important than ever.
‘Your house is your biggest financial asset and it needs to be treated as such,’ says Shaw. ‘The idea of just putting it on the market is foolish. You need to make sure it is as attractive as possible as first impressions are everything.
‘When somebody walks though the door, if you have 100 photographs of your family everywhere, it is off-putting.’
Are you considering downsizing as a result of the mansion tax? Email lucy.evans@dailymail.co.uk
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