Lib Dems scrap mansion tax plans in favour of new council tax bands for homes worth over £2m

Danny Alexander, Chief Treasury Secretary (Getty Images)

The Liberal Democrats have revised their long-standing plans for a mansion tax and would instead impose higher council tax bills on homes worth more than £2 million.

The switch could give the Lib Dems a better chance of achieving their goal of higher property taxes for the rich if there is another hung parliament after next year’s general election. George Osborne, the Chancellor, was sympathetic to the idea during negotiations with the Lib Dems on his 2012 Budget, but David Cameron blocked the idea then. Labour supports a mansion tax in principle to raise about £2 billion a year, as the Lib Dems envisaged, but could back the council tax plan as an alternative way of securing the revenue.

Danny Alexander, the Lib Dem Chief Treasury Secretary, announced that his party would no longer call for a one per cent annual levy on the value of a property over £2 million. Instead, he said, it would propose a “modest additional banded levy on top of council tax for high value properties”.

He argued that the move would “release a wee bit of steam” from the top end of the housing market in London, bringing the capital’s property taxes into line with those in New York, Paris and Frankfurt.

Speaking in London, Mr Alexander said the Lib Dems’ new plan had already been worked through by the Treasury. He added: “The annual charges, in addition to council tax will be set out in good time ahead of the general election next year. By building on the council tax system, there will be no need for a detailed valuation of the small proportion of properties affected. Crucially this means that this policy could be implemented quickly after the election. And people in homes valued at below £2 million would continue to pay just council tax.”

The Treasury minister said the proposed system would be “simple, practical, deliverable and fair”. There would be no additional charge on homes valued below £2 million. The new levy would be collected in the same way as council tax, via local authorities, then handed to the Treasury nationally. “With the level of the bands up rated annually, people living in typical family homes need have no fear of being sucked into this levy,” he added.

The eight bands on which council tax is based in England – from Band A (up to £40,000) to Band H (over £320,000) – have not changed since 1991 even though property prices have increased sharply. This means that all homes worth more than £320,000 in 1991 pay the same council tax in their local authority area.

Under the proposed change, people in Band H would pay an extra levy if their home is worth more than £2 million. For example, there could be one band for properties worth between £2 million and £5 million and another for those valued at between £5 million and £10 million.

Householders would be allowed to appeal but Mr Alexander hopes that a system of bands would result in fewer appeals than under the original plan for a mansion tax. People living in expensive homes who could not afford the new levy could be given state help, which would particularly aid the elderly.

Liz Peace, chief executive of the British Property Federation, said: “We are delighted that the Lib Dems are taking this much more sensible approach to the mansion tax. The council tax system remains in principle a better way of taxing property, if the valuations on which it is based are up-to-date. At present we have a property tax that is based on 1991 values, when the average house in the UK was worth £62,000, the Soviet Union was still in existence and Bryan Adams topped the charts. Adding some additional bands of council tax makes sense as a sticking-plaster measure, but ultimately if fairness is politicians’ goal then only a full revaluation in conjunction with more bands will do this.”