Reeves’s mansion tax has backfired before it’s even kicked in

The Chancellor, Rachel Reeves, made plenty of bold promises for her planned mansion tax when she announced it last year. It would be a victory for social justice. It would create a fairer housing market. And it would raise the money the government needs to fund public services. How has that worked out in practice?

It turns out that Reeves’s levy on homes worth more than £2 million is already costing hundreds of millions before a penny of the new tax has even been collected. There shouldn’t be any surprise about that. Wealth taxes, which is what the mansion tax amounts to, always backfire. This is just the latest example. 

Introducing an extra tax on homes worth more than £2 million, with a sliding scale up to £5 million, is turning out to be a lot more complex than expected for the Treasury. It has been reported that Treasury officials estimate that, in the three years between Reeves announcing the levy and it coming into effect in April 2028, there will be a £230 million fall in stamp duty and inheritance tax revenues as values drop to around the threshold at which the tax is levied. Identifying and valuing all the homes that will have to pay the new tax is likely to cost another £150 million. Add the two figures together, and the mansion tax will end up costing the government £380 million before it raises any cash at all. 

The reality of this situation, though, is likely to be far worse than that. The Treasury modelling does not take into account the impact on corporation tax or VAT receipts, for example, so those will have to be added in. Nor does it appear to allow for all the money that will have to be spent arguing over valuations when they are made. Likewise, over time, it will mean fewer high-end houses or apartments get built (given that there will be less demand for them), meaning the government will collect less income tax and National Insurance from all the workers who might have been building them and from the estate agents who might have sold them. And it will mean that even fewer wealthy executives, bankers and entrepreneurs will move to Britain – assuming they have not already been deterred by punishing income and inheritance taxes – losing even more revenue for Reeves and whoever succeeds her.

The Treasury is still bravely trying to insist that this mansion tax will eventually raise an extra £1.4 billion in net revenues. But that already seems wildly optimistic. The costs have begun to escalate and will go even higher. But the tax won’t even come into force until 2028/9 and, given the British government’s dismal track record of implementing major new schemes, it may well be delayed. There is every chance the tax could even get pushed into the next parliament.

The real scandal here is that Reeves did not realise in advance that introducing a mansion tax would quickly turn into a fiasco and pressed ahead anyway. Class warfare, it turns out, is expensive and seldom worth it. Unfortunately it looks as if the country will have to learn that simple lesson all over again.