While the finer details of the Labour party’s Mansion Tax remain unreported, the basic lower threshold of £2m and an annual charge of £3,000 for properties valued between £2-3m appear to be set in stone. With over 80% of £2m+ properties sold in England & Wales during 2014 being located in London, we took a look at what constitutes a London mansion and what the possible implications for owners of qualifying property could be.

What is a London ‘Mansion’?

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hoW big is a London ‘Mansion’?

582 sq/ftAve PCL

1 bed

811 sq/ft Knightsbridge

871 sq/ft Mayfair

989 sq/ft Ave PCL

2 bed

1027 sq/ft Chelsea

1302 sq/ft Marylebone

1338 sq/ft Holland Park

1549 sq/ftHyde Pk & Bayswater

1647 sq/ft Ave PCL

3 bed

(Based on average achieved square footage values at Q1 2015)

As you will see from figure 1, the average 3 bedroom property in all six Prime Central London (PCL) areas analysed would be considered a ‘Mansion’, alongside a vast majority of 2 bedroom properties in areas such as Mayfair & Knightsbridge.

1. Capital ValuesUnlike most market commentators, we do not foresee capital values being significantly affected by the introduction of a Mansion Tax alone, and it could well be the case that the uncertainty pre-election proves to be more disruptive than the actual implementation should we witness a Labour victory. Whilst the proposed charges above £3m remain a mystery, it is widely expected that a large proportion of the estimated £1.2bn total receipts are to be raised from property at the higher end of the scale. This is a section of the market where owners on the whole have limited concern for a buildings annual running costs. In the Super Prime market (£10m+), an additional yearly five figure tax would be absorbed into what are already high annual running costs. Global political issues and currency stability are more prominent on the radar of the average HNWI.

2. areas impacted most2.1 PCL LettingsOne area that has the potential to be impacted is the letting markets of traditional Prime Central London areas such as Mayfair and Knightsbridge, where (based on average achieved prices @ Q1 2015) £2m buyers you 871 & 811 sq ft (respectively). The addition of a £3,000+ annual tax on properties in these markets has the potential to drag average net rental yields below 2%. Whilst low yields have historically been accepted by landlords active in these markets, the flattening of capital value growth in the near future will undoubtable refocus investor’s attention towards rental yields. A sub 2% net rental yield would deter all but the most speculative of investors, reducing new investment and also possibly lead to a small number of existing investors abandoning core PCL in favour of the higher yield & potential capital value returns in the Outer Prime market.

1. A large, impressive house

Synonyms: residence, hall, abode, stately home, seat, manor, manor house, country

house, villa, castle;

Mansionnoun

PossibLe iMPLiCations & issues

2.2 The equity rich, cash poorOne of the unintended consequences of the tax would be the capture of equity rich, cash poor households. To combat this the Labour party have proposed a £42,000 threshold at which households with a lower annual income would be able to defer payment of the tax until the point at which the property is sold. It is unclear how many households would qualify for this deferral, but what is certain is there will undoubtedly be losers in the income bracket slightly above £42,000. Although in national terms, a household income of £42,000 would be considered reasonable, the higher cost of London life, coupled with expensive block service charges make the stated threshold look a little on the low side. It is for this reason that we would expect this deferral threshold to be re-assessed and increased should Labour come to power.

4. administrative burdenOne area we foresee a major problem is the administration of such a scheme. Firstly the job of accurate valuation would surely prove immensely complex and expensive. When you add to this the undoubted deluge of appeals of those in and around different thresholds, you are left with the potential for a rather

weighty administrative workload. Generally speaking, owners of property in the £2m+ bracket are often more than comfortable engaging in lengthy litigation processes and it is for this reason that we see the administrative element as a major hurdle in the delivery of a mansion tax.

3. over reliance on a very small and volatile marketAs mentioned above, it is expected that a vast majority of the projected £1.2bn receipts would be collected from the higher end of the property value scale, specifically the Super Prime market. It is our view that this top loading of expected receipts is risky due to the volatile nature and limited size of this market. As you can see from figure 2, the Super Prime market operates almost autonomously from the mainstream market both in terms of capital value movements and transaction levels, due mainly to differing demand drivers. This volatility increases the possibility of a considerable variation in receipts from year-to-year.

Carter Jonas London Index Capital Values: Jan 2014 - Mar 2015

120

115

110

105

100

95

90

85

80

Jan

14

Feb

14

Mar

14

Ap

r 14

May

14

Jun

14

Jul 1

4

Aug

14

Sep

14

Oct

14

Nov

14

Dec

14

Jan

15

Feb

15

Mar

15

Jan 2014 = 100.0

PCL mainstream market

PCL Super Prime (£10m+)

Source: Carter Jonas Research

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Lisa Simon Partner, Head of Lettings 020 7518 3200 | 07976 761721 lisa.simon@carterjonas.co.uk

Rory O’Neill Partner, Head of Residential Division 01672 519705 | 07801 666120 rory.oneill@carterjonas.co.uk

Lee Layton Research Analyst 01604 608212 | 07768 308737 lee.layton@carterjonas.co.uk