226. Will Labour’s Mansion Tax Backfire?

0:10Hello and welcome to the Rest is Money with me Robert Perston and with me Steph McGovern and And I just have to apologise to everyone who is watching this and not just listening in their ears. I'm dressed like a Yeti because it's absolutely Baltic in the northeast. It's full on snow and sleet here. And I'm out in a little pod in my garden freezing my tits off. Oh my God, are we allowed to say that? Oh yeah. You don't look like a Yeti, you look like a very stylish Yeti. Look, we're counting down, what is it? Seven sleeps or something to the budget, isn't it? And fewer than that. Yeah. When you're listening to us, I imagine.

0:47Big, big, big economic event, big political event, big event that's going to affect almost all of us in terms of tax rises. We said in the last podcast that she has ruled out the tax change that most economists said would be the most important tax change, which is putting up the basic rates of income tax, almost certainly combining that with a fall in national insurance. Well, she's not going to go down that route because she's terrified of the political backlash. But she is going to do a bunch of other quite significant stuff to the tax system. And we should go through, I think, some of the more significant measures today, starting with what some people see as her proxy for a wealth tax, which is raising more money from those who own more expensive houses.

1:34Steph, you've been looking at this. Talk us through the main options that she's been looking at. So it's something you and I have discussed a lot on the podcast is how do you get more money from people who have very valuable homes, but don't pay a council tax that reflects that value and that potential wealth they have. So some of the things on the table that have been talked about, one is for more expensive homes in terms of council tax banding. So the banding you have is obviously lettered, isn't it? And the higher the letter in the alphabet, the more expensive it is. And so what is being rumoured is this looking at bands F, G and H, which is about 2.4 million homes in England.

2:20It's about one in 10 homes in England. And looking at revaluing those with a view to the top 300 ,000 of them getting a council tax increase. So some type of additional levy on their council tax to reflect that they are worth more money as houses. So that's one of the things that's being talked about. The other is one we've again mentioned on the show before, kind of mansion tax, a property tax, which is based on the value of the home and then a percentage of that being set as a property tax each year. So kind of 1 % on the value. And again, we're talking homes in the millions, aren't we, Robert?

3:04It's not the average house price or anything like that. We're talking about very expensive properties. Obviously, that lends itself to being houses in the south of England, And it could impact, couldn't it, sales, prices, what people do with their homes to try and avoid these taxes because there will be an annual additional tax. And that could put a lot of people off wanting to live in expensive homes anymore. And that could be a problem for the market, couldn't it, Robert? Yes. And actually, we should say these proposed changes are not rumoured. We know that the Treasury has been looking, well, I know the Treasury has been looking at doing something along those lines.

3:46But there are big practical problems. I mean, one of them is that the last time houses were revalued for council tax purposes was in 1991. Ridiculous. And so making sure that whatever tax is imposed, whether it's the one that looks more like a wealth tax, the 1 % on the value of a house over£2 million, or whether it's whacking up council tax is one of those two options. there's a risk that you don't get all the most expensive houses caught in the net because, of course, lots of houses have been developed since then. There's been rises in some parts of the UK, some parts of London in particular, greater than in other parts.

4:32And therefore, you could just end up with quite a lot of really quite expensive houses not being taxed and other properties being taxed, which potentially might not be quite as valuable as the officials think. And then there are just all sorts of other real practical difficulties. Some of the people who, if you happen to be somebody who doesn't have an enormous amount of money, but you happen to live in Notting Hill in London, your house is now worth millions and millions and millions of pounds. That's an area that's literally gone through the roof over the last 30 years. And there are still people who bought their houses in the 60s and 70s, but are not rich in income terms.

5:12Let's say it's the 1%, right? It would be 1 % on the value of your house, more than£2 million under one option, right? Now, let's just say your house is now worth£3 million. That's 1 % of a million quid. That's£10 ,000 you've got to find a year. there will be people in valuable houses who simply don't have£10 ,000 spare. Now, one idea, which actually, funnily enough, I talked about in a couple of my previous books, when you look at this issue of the sort of how do you tax people who have wealth but no income? One of the things that the government could do is to say that you incur the liability, but you don't have to pay it either until you sell the property or indeed until you die and it comes out of your inheritance tax.

6:00The taxman knows that the money is coming. Those people who lend to the British government know that the money is is coming. So it is sort of guaranteed future income. But, you know, the politics of saying to people, actually, you know, when you die or when you sell, you're going to be a lot poorer. That's that's complicated. And then there's just one other aspect. Well, there are lots of aspects of this. Let's look at the council tax element of all of this. Under the current system, let's just say they go the route we think is more likely, which is effectively to create the new top band of council tax and levy a much higher rate of council tax for those hundreds of thousands of houses that are in that top band.

6:45It looks to me as though it's the route that's likely to go under the current sort of rules and regulations. That money would go to councils. Right. But the government doesn't want to give it to councils. The government wants it for itself. And they've already done through their spending review a settlement with councils. So if they were to go that route, they've actually got to somehow review the settlement to councils and take back some of the money that they're giving to councils, but leave them with the extra money that's being raised through council tax. So it's genuinely quite messy and complicated.

7:21I wonder though, if on your point about those people who have these very expensive homes through a legacy thing of buying them when they were cheap many years ago, or inheriting them or whatever, and not being cash rich, whether that might be a good thing to encourage movement in the market, because will it free up a bit more stock that at a cheaper price? Will it mean that? And I know it would be unfair essentially on those people who aren't cash rich, but then they could get cash rich from selling their home and it could just help them ease the market a bit, provide a bit more supply of bigger homes because maybe then people who are living in these big houses will move out of them and taxes always hit some people harder than others and maybe that's fair that they've already benefited from a massive increase in house prices that we'll probably never see again.

8:14So I don't know. I mean, I'm saying that as someone in the north where houses are much cheaper and if it was my house, I'd probably be raging. But maybe that might be a good thing for the housing market. I don't know. I think they would disagree. No, no. I think the economics of doing what they're doing in a theoretical sense, I think are positive. Actually, there's one aspect of the economics I need to get onto, which could be actually quite a big problem for them. and I'll come back to that in a minute. The politics, however, could be absolutely terrible because putting to one side those people who in some senses are just lucky that they bought properties decades ago in areas that have now absolutely soared in value.

8:53And obviously, if some of those came on the market and the prices came down a bit, that might mean that properties in London became a bit more affordable for younger people. But, and this is the big but, But we've already seen, there's already quite a lot of data that because of anxiety about these sorts of taxes, the property market, it's frozen. It's not moving. People are not selling in London and the southeast. So I will bet you that very large numbers of Labour voters in London and over the last few years have mortgaged themselves to the hilt at these very low rates of interest that we did see and have now disappeared, have huge debts.

9:37And some of them may own houses that are worth more than two million. And some of them may own houses that are creeping up to being worth two million. Now, the anxiety for those people will be that this kind of tax will massively, significantly reduce the value of London properties. And the thing that would be a nightmare for those people would be if the value of those properties fell below the value of the mortgages, the debts that they've taken out to buy those properties. Negative equity. We moved into this situation called negative equity. So those people are going to feel a lot of pain. There's a lot of misunderstanding about who are Labour supporters.

10:22A lot of Labour supporters are young London professionals on pretty big salaries. Right. Obviously, the Labour Party wants to win back some of the white working class from the north. But a lot of those people have gone to reform and are not coming back. Whereas young at university educated professionals are typically Labour supporters and they are responsible for the fact that Labour in recent years has been so dominant in London. Now, if those people feel absolutely savaged by tax rises of this sort, then they are definitely going to be giving a bigger hearing to the Lib Dems and indeed to the Greens, who are absolutely soaring in the polls at the moment.

11:01You know, quite a lot of the Greens policies are, you know, you would say more on the left than what's being proposed. Either way, this could punish quite a lot of Labour voters. And then just on the economics of this, and I hope before the Treasury announces anything, they have talked to the regulatory arm and the supervisory arm of the Bank of England, the Prudential Regulation Authority, because if it were the case that a fairly significant drop in the value of houses led to a significant rise in negative equity, If a very large number of properties in London and the southeast fell below the value of people's debts, then you have a problem for the banks.

11:48Even if those are not people who are going to renege on those debts in the short to medium term, some of them might well have difficulty paying if this is somehow associated with an economic slowdown and people losing their jobs. even if that economic slowdown doesn't happen, under the rules banks have to follow when it comes to assessing their profits. If the value of those properties fell below the value of the mortgages and the banks feared that over time people would struggle to pay their debts, then they've got to make what's known as provisions. And provisions are basically losses for the banks.

12:23And if the banks have to basically announce losses against their property lending and the building sizes have to announce those losses, then they will be weaker and they will fight it harder to support the economy with credit. So, as I say, you know, I'm assuming that if the Treasury goes down this route, it will have, you know, essentially talked to the Bank of England about the impact on the banking system of this kind of thing, because there is more than theoretical risk that if you do impose one of these taxes, you could have quite a big housing market shock. This obviously feels very reminiscent in terms of negative equity of the credit crunch.

13:02And that time when mortgages were being handed out that were 100 % mortgages or even higher than that, where you were essentially being given money to do up your home as well as being given the money to buy it. And, you know, I had a number of friends who took on these great, as they were seen at the time, mortgages, which were much more accessible for people on low incomes who didn't have deposits and things. And then they took on these really big mortgages. Then obviously we had the subprime lending crisis. We saw, you know, the collapse of the banks, which obviously you covered extensively on the telly with me behind the scenes answering the phone.

13:41We had that moment, didn't we, which caused total chaos, as you say, where people were left unable to sell property. And even if they could sell it, they weren't getting back the value to cover their debt. And I saw that anecdotally really hit some of my friends. There's been a real, real fear about things like that. But I think you pointed out on a previous episode, Robert, about how things are very different now in terms of the bank's liquidity and the bank's facility to have provisions. because they did have to then put bigger buffers in. And so it's not like even if we did have this problem with people ending up in negative equity and then the banks having to write off the debt or make provisions, as you say, we're in a much more better position than we have been in the past in terms of how much money the banks have set aside for problems like this.

14:34So that feels like it wouldn't be as big of a crisis as it could have been in the past. And secondly, that point you make as well about it pissing off, basically, the London Labour supporters who are young professionals and everything else. Rachel Reeves keeps telling us that she's going to do what's right for the country and not politically easy choices. And I know we don't have evidence of that so far, given the U-turns we've had. But you can't do both. You've got to annoy someone and it potentially is going to be voters in some way or another. Just in terms of, as you say, doing what's right for their country and how resolved she will be in that sense.

15:13I talked about, you know, youngish professional Labour voters being at risk here. There's another group that are not going to like it, which are basically the editors and senior editors of newspapers and TV companies, almost all of whom will be owning expensive houses that are being financed by large mortgages, they will scream in pain. If they were feeling that they were going to campaign against this government before the imposition of this tax, I suspect, though they'll try and put their personal circumstances to one side, I suspect some of them will be feeling very, very bitter. So that's quite a political risk, shall we say, for the government.

15:54Yeah, fair point. We'll see if they hold their nerve. Look, you're absolutely right to say about the banking system. British banks have much more capital. They have much more liquidity than they did in the run up to the financial crisis of 2007-8. And that means that they are in a much better position to withstand shocks. Absolutely no question about that. But this is in some ways much more like if it does transpire, as I say, that prices fall quite a lot. This will feel much more like how it felt in the 1990s rather than at the time of the financial crisis. Why do I say that? Yes, of course, there were quite a lot of people at the time of the financial crisis who for a period felt quite a lot of pain because, you know, prices came down a bit.

16:45debts were high. But we then moved into an era of super low interest rates where you could, you know, you could borrow money from the banks to buy a property at interest rates that were quite close to zero. The property markets, certainly in London and the southeast, but more broadly, recovered incredibly quickly. And actually, the big problem was that people then genuinely took on really rather large debts. You know, we've been living through this period of readjustment to higher interest rates. And for hundreds and hundreds of thousands of British people, as their, in fact, millions of people, as their mortgage rates have been reset at these new higher levels, there's been an enormous amount of pain over the last two to three years.

17:31If simultaneously now you get the higher interest rates that people are paying, and indeed, we're not completely through this cycle of people having to reset their mortgages at higher rates. If you combine that reset of mortgage payments at these much higher interest rates with a fall in property values, that economically is really a biggish problem. And yes, of course, I'm not at the moment saying, you know, we're going to see the kind of property crash that would undermine banks to the extent that they would get into very serious difficulties. But the fact of the matter is that when banks make lower profits, they are accumulating less capital and their ability to lend more is reduced.

18:18And this is a government that actually wants basically the banks to be supporting the economy, whether it's lending to individuals or to businesses as much as possible. And there is just a risk, I'm saying, that in these circumstances, there would be losses for banks that would not cause the banks to go bust or anything of that sort, but would just, frankly, make their ability to support the economic growth rather less. And that is an economic impact that I'm hoping the Treasury has been modelling, which takes us actually on to another one of the measures, which I'm absolutely certain is going to happen, which is this change in the sort of subsidies for people who put money into a pension fund.

19:01And it is this system called salary sacrifice, which they are going to fundamentally change. I think we need to go through that as well. Yes. Well, why don't we do that after the break? Because there's also stuff we want to talk about around electric vehicles and how they are going to be potentially taxed in this budget as well. So let's go to a quick break and then we'll be back with you in a more. This episode is brought to you by Google. Now, small businesses are the backbone of the UK economy. But most owners are stretched, juggling roles to keep things running. They need tools that work. That's where Google's AI helps.

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20:28Google is fueling the UK's growth and transformation. To find out more, visit www.go.gle forward slash 10 stories. Welcome back to The Rest is Money. So we're talking about what we think is going to come out in the budget on the 26th of November. Remember, we've just been talking about property tax and potential changes there. But the other biggie, Robert, is the salary sacrifice. So do you want to just explain what it is and what you think is going to change? Yeah. So look, this is a way that many hundreds of thousands of people make their contributions into pension schemes, save for retirement.

21:05It's a sort of slightly surreal system. I'll explain it by way of an example. Let's just say you earn£50 ,000 a year and you want to contribute£5 ,000 into your company's pension arrangements, pension scheme. What the company will say to you as part of the salary sacrifice approach is from the point of view of tax and national insurance, they will reduce your salary to£45 ,000. pounds. So you will only pay tax and national insurance on the 45 ,000 pounds and they will pay the 5 ,000 pounds that you would have paid directly into a pension scheme. They will pay it for you into the pension scheme.

21:52Yes. So basically what happens is they take the pension contribution at source from your income and then they tax you on the rest of it. You know, if you get pay slips and you do the salary sacrifice scheme, you'll have seen it on there as, you know, it's taken out before you hit with the tax. And because company contributions to pension schemes do not attract employer national insurance, there is a national insurance saving both for the employer and the employee, right? So there's a double national insurance saving for the employer and the employee because of this pretense that your salary is£45 ,000, not£50 ,000.

22:40Now, one of the things the government is absolutely planning to do is to, I don't think it's going to completely abolish salary sacrifice, but it is going to say it would only operate up to, I think the number is something like two grand a year of salary sacrifice. In our notional case, three grand of the five grand would suddenly attract national insurance. And the other thing which the government has also been looking at and not clear whether it's going to do it, is whether in general it will also make companies pay, and certainly this is something that a lot of the think tanks think it ought to do, make companies also pay national insurance on that element of the money that they put into pension schemes on employees' behalf, so what's known as the company contribution.

23:34It's obviously just worth reminding people, it was this time last year when employers were hit with that rise in national insurance contributions. So this would be another increase in terms of how much national insurance organisations are having to pay on behalf of their employees. It would be a double whammy of national insurance increases for employees, employers, slightly hidden, right, but absolutely real. And as you say, for a government that has said that it does not want to increase costs on businesses and massively in the way that you have just said increased costs on businesses in the last budget with that very significant rise in employers' national insurance, this would be deeply unpopular with companies and indeed with anybody who's saving for a pension.

24:20The reason why I suppose many would be anxious about this and understandably anxious about this is it does fly in the face of so much of what the government says it wants to do. I mean, it wants, for example, people to save more for retirement. It wants pension funds to be bigger and more confident and investing more in the UK. And there's a real risk with these changes that there'll be two negative effects. One is costs may go up for companies. But one of the ways that companies and indeed individuals may offset this may be to actually save less. Right. So one of the ways you could afford the disguised tax increase, that decides increase in national insurance is just to put less money into pension funds.

25:15But that's mad in terms of for a government that wants to see more investment and higher growth. The last thing you want to see is less saving into pension funds, because that is a way, frankly, of not only helping people to be in a better position when they retire, but it also provides more capital potentially for investment into the UK economy. It does feel like a short-term way of raising money by a sort of backdoor method for a government that doesn't have the courage and the confidence to raise money through the front door, which is what it would have done if it had had the courage to go ahead with the rise in basic rate income tax.

25:56And just to add to that in terms of how many people we're talking about and who we're talking about, the Society of Pension professionals have put out some figures on that. And they say a third of private sector employees currently use this salary sacrifice arrangement, and it's around 10 % of public sector workers as well. And so in the run up to this potentially happening, they've been trying to kind of assess what it might mean. And will it mean that people put less money into savings? Because as you rightly say, Robert, one of the incentives is you thinking, oh, well, that is a bit of a you know, saves me a bit of money just going to taxes.

26:34And so this is a way to, you know, add a bit more to it. And the Association of British Insurers, the ABI, who obviously have a vested interest in all of this, they have done some surveys around it and said that around 40 % of people say they're going to put less into their pension if this change comes in. Now, obviously, you don't know when you answer these surveys, you could say anything. No, but Steph, we do know. 40 % may not be right, but it is basic economics, right? You put up the price of something, it has an impact on how much people spend on demand. And we shouldn't pretend otherwise.

27:09Yeah. No, but I mean, we don't know the exact amount of people who will change behaviour because of it. But the point we're both making is it means people will put less money into pensions at a time when we should be encouraging more pension savings because people keep getting to retirement later on in life and not having enough money to pay for everything they need. Before we get on to electric vehicles, actually, funny enough, I was talking to somebody who'd helped to design the abandoned plan to put up income tax by two pence in the pound, simultaneously reduce national insurance. And actually, this person pointed something out to me, which I'm not sure if the government even noticed, but there was potentially a massive political win here for the government in a part of the country that they're really worried about.

28:00So under the scheme, as you know, which we have talked about, we talked to, if you remember, the head of the Resolution Foundation. They suggested this as an idea, didn't they? Yeah, it was one of their recommendations, but it's something the government had been working on for some months. And it was put up at the basic rate by a couple of pemp's, cut national insurance by a couple of pemp's, so that quite a lot of workers would have been protected. But here's the hilarious thing. It would have been a straight bung to the people of Scotland because the government cannot set the basic rate of income tax in Scotland, but it does set the rate of national insurance in Scotland.

28:38So in Scotland, the Labour government would have actually cut taxes for all working people in Scotland. Yeah. Because nobody would have suffered the rise in income tax, given that they're really floundering in the polls in Scotland. This would have been a big bung, which they've now deprived themselves of. But anyway, that's just a slight digression. And there's a big election coming up there as well. So, you know, it's the elections there next year. So you're right. This could have been a massive win for them. They missed the opportunity to bribe the people of Scotland ahead of the May elections.