Following the announcement of the ‘mansion tax’ last year there has been much speculation about how properties will be valued and what affect this will have on property prices.

The task of valuing properties throughout England to check which ones fall above £2 million (and which bracket they then fall into) is to be completed by the Valuation Office Agency (VOA), and many are wondering how it will cope with the volume needed to make the tax work before it goes live in April 2028.

But apart from the volume of properties there are issues around leasehold property and country homes that need to be considered.

Leasehold issues

All flats are ‘owned’ on a leasehold basis apart from the few that are commonhold and remember in some places, houses may also be held under a lease particularly in London.

In areas such as Mayfair, there may be a complex series of leasehold ownerships meaning that there are multiple owners of the same property.

Even in a simple case a flat that would be valued at more than £2 million if it were on a 999-year lease may be held under a short lease meaning that the value is split between the landlord and the tenant.

In this case, neither of them are likely to own an interest in the property worth more than £2 million so why should either of them be subject to the new tax?

Given that it is a tax on the value of the property, then no-one who owns an interest in a property which is valued below the relevant threshold ought to have to pay the tax.

Complex valuation

But to arrive at the truth, a quite complicated valuation process may need to be undertaken which is not something that either the Government or the VOA contemplated when the tax was proposed.

If Ministers take the view that it is the person with the most immediate legal interest who should bear the tax then that seems to be unfair if their interest is worth less than £2 million, but surely it cannot be right that the freeholder bears the tax in this or any situation.

If it is accepted that neither party has an interest above the threshold, then the government is opening the door to the creation of a myriad of leasehold structures the intention of which would be to decrease the value below the threshold.  There seems to be no correct answer here.

Parliament

But the question seems to have been answered in part by a reply to a question raised in parliament by David Simmons MP.

The answer is that the VOA will value all flats on the basis of an assumed lease length of 99 years at a nominal rent whatever the reality of the situation.

This will create many inequitable situations with some owners of flats whose legal interest has a market value below £2 million having to pay the mansion tax despite the government’s announcement that it is “a new charge on owners of residential property in England worth £2 million or more in 2026”.

This begs a further question; who is going to receive the surcharge demand?

Is it the person who is registered for Council Tax or someone else?  The Council Tax payer may be a short-term tenant who is not the “owner” but are councils going to be expected to find out whether the person they have registered is actually the owner of the property or just the tenant?

Or will they just send the demand to the Council Tax payer and wait for them to complain if they are not the owner?  And will councils be compensated by central government for the additional cost of maintaining a second register of legal owners of properties?

Or do they intend to charge the Council Tax payer irrespective of their legal interest?  Perhaps the latter approach is consistent with their approach to the valuation of long leasehold interests even though absurd in the context of the stated purpose of the tax.

Rural problem

Country properties may create other issues.  If you browse the property pages of a magazine like Country Life it is easy, one might think, to identify which properties are worth more than £2 million.  But often these properties contain land, outbuildings and other facilities which push them above the threshold, but without which they might fall under it.

What is the VOA going to value in these cases?  The most sensible solution is for the valuation to be on the same basis that HMRC adopts when considering the extent of a private residence that will be exempt from Capital Gains Tax.

When you sell a large house and claim Private Residence Relief you are generally allowed to claim the exemption on grounds and buildings of up to half a hectare (although this can be increased where further land is required for the “reasonable enjoyment” of the property).

If the same rule were applied then the valuers would use this as the guideline to value a house for the new tax and thereby exclude additional land, outbuildings and other facilities which would enhance the value.

It would be unfair to adopt a restrictive definition of a property when calculating an allowance, but a wider definition when calculating a tax.  But perhaps we should not be surprised if they did so.  There is, after all, nothing particularly fair about the new tax.

Ministers have said there will be a consultation in the Spring on issues related to the mansion tax (or High Value Council Tax Surcharge as it’s known officially) and it will be interesting to see if it covers these points.

Robert Barham a Partner in law firm Forsters residential team

Read more about the mansion tax.