The UK Coalition government may impose a “mansion tax” to placate Liberal Democrat members uneasy about the Conservatives’ desire to shed the top income tax band of 50 per cent, but such a property tax will be derailed by practical details, a tax expert warns.

In recent months, George Osborne, the Conservative finance minister, has hinted that the 50 per cent tax on annual incomes of £150,000 (around $247,700) or more could be scrapped. The top rate was introduced before the 2010 general election by the then Labour government. The old top rate was 40 per cent. The new tax band has been attacked as a form of destructive “envy” politics and blamed for making the UK less attractive for investors.

However, as part of any political compromise, the Lib Dem side of the coalition, led by deputy prime minister Nick Clegg, may insist that a tax on high-value property transactions must be imposed. The idea had been floated by senior LibDem politician Vincent Cable before the 2010 election. The issue of fairness has become more sensitive in the wake of recent riots in London and elsewhere, seen in some quarters as a sign of growing inequalities in UK society.

George Bull, senior tax partner at Baker Tilly, said a “mansion tax” faces serious problems, regardless of political merit.

“It is now recognised that a 'mansion tax' structured as an annual levy on expensive properties is unworkable. From the perspective of a tax practitioner, irrespective of the political issues surrounding the earlier mansion tax proposals, asking an already over-burdened HMRC to take on the responsibility for dealing huge numbers of returns, regular valuations and the inevitable disputes that would arise was always a non-starter,” Bull said in a note.

“For the proponents of 'son of mansion tax', to focus on the levy based on the sales proceeds or on the gains arising on the sale of a property is simpler. For one thing, agreed sales proceeds are an easy target for the tax man especially as sale notifications already have to be made in connection with stamp duty land tax,” said Bull.

“Furthermore, it would only be a short step to require the purchaser to deduct a percentage of the proceeds and pay them over to HMRC as the vendor’s tax. This is not without precedent; those with long memories will recall that development land tax operated in this way back in the 1970s,” he said.

He continued: “Of course, there will be situations in which the amount deducted by the purchaser and paid to HMRC is incorrect.  However, once tax has been deducted, the realities of life mean that it would be the vendor who had to argue the case with the tax man.”

Among other specific issues, Bull said that setting the “mansion tax” threshold at a figure of around £1 million, for example, “will bring large swathes of the south and south east of England, the leafy suburbs of Manchester, parts of Dorset and other property hotspots into a completely new tax net”. (Such areas are key electoral districts for the Tories and LibDems).

“The initial impact will be to freeze the upper levels of the residential property market in those areas, until the impact becomes clearer. Governments have a habit of allowing inflation to erode the value of thresholds, so widening the scope of the tax net.  If there is to be any political integrity to the mansion tax, then the threshold must be linked to a property price index,” Bull said.   

He said: “a tax charge based on the profits on sale of a valuable residential property would require considerable extra administrative effort both for the vendor and HMRC.  Computations of the gain would have to be calculated and agreed, and tax collected, presumably through the self assessment system.  Property owners would have to maintain records over many years.  This in itself would be problematic.  For example, somebody who bought a house for £50,000 in the early 1970s could now find themselves caught by the mansion tax.”

Bull added that capital gains tax is not charged on death at present, but if a “mansion tax” did not treat death as a taxable event, that would be a major incentive for elderly people to continue to live in very large properties (potentially inappropriate for their then needs) merely to avoid paying mansion tax on a lifetime sale.