The big news this week in the UK media has been the announcement from the Labour party that they will introduce a ‘Mansion Tax’ based upon the value of your home if it is worth more than their baseline of £2million. With the general election coming up next year, it’s interesting to see a party actually planning to raise new taxes rather than announce the usual vote swinging promise to lower them.

Personally I’m in two minds about this form of taxation. Being a Parish Councillor and on the Infrastructure and Finance committees; I have a direct insight into why taxes are required and how the money is spent within the community. Taxes are an important part of our economy and ensure basic services are maintained as well as supporting the vulnerable. However, what I am against is any form of taxation which seeks to discriminate against those who have worked hard for their achievements.  I’m a strong capitalist and believe that hard work and achievement should be viewed favorably instead of met with criticism and additional restrictions such as higher taxation rates. This form of proposed ‘Mansion Tax’ is particularly worrying as it makes no account for a person’s actual income rate. The guru of UK retirement blogs, Ermine has already already encountered this problem first hand and it makes for potentially worrying reading to us aiming at early retirement.

One of the main strategies to achieve early retirement is a focus on reducing expenses whilst accumulating capital. This capital lump sum is then used to provide a normally low level of income which matches the previously achieved low level of expenses. Capital rich but income poor means you become a big target for this type of taxation and with the double whammy of not having a suitable income to pay it. Even more worrying is that in this case the capital valuation is based upon an asset who’s value is largely beyond our control. House prices are effected by so many external factors that it may be impossible to predict if/when the value of your property will pass the benchmark and you become liable for a new annual tax expense.

Supporters of this kind of policy will always argue that it is aimed at the super rich and so will not affect the vast majority of us. However as we’ve seen many times in the past; baselines tend to creep and I wonder how long until the required house valuation falls to £1million, £500k.. £250k. UK council tax is already based upon your house’s value with little regard to the household income and stamp duty imposes specific percentage increases at  different valuation points. It’s clearly not just the super rich who are being hit by this kind of capital based taxation.

In my ideal world; taxation would be at a set level based upon a person’s income. Those who earn more will automatically pay more without the need for different bands of tax rate and accumulated capital will be left untouched as the income required for that accumulation has already been taxed. Obviously this is likely to be an unsustainable economic model for a country so heavily invested in public services such as the UK however it does make me question the current system of taxing income, capital AND spending such as we currently do. Potentially adding in a taxation on death in the form of inheritance tax too.

If you, like me, are working on the reducing expenses whilst accumulating income generating capital plan then proposed policies such as this need to be heeded as a warning call. You might not have a £2million house.. but you will almost certainly achieve an above-average savings pot of cash and stocks which could become easy pickings for those pesky taxes.

Will you be hit by a mansion tax, or worried that you may be in the future? Or do you support taxation on capital and think it’s a vital way for raising government funds? Please let us know in the comments below.