Sultan's tax discount on London house shows law favours rich

 

Three generations of the Braithwaite family are crowded into a rented three-bedroom row house, a 10-minute drive from the Sultan of Brunei's mansion on London's "Billionaires Row."

The difference in the two households' property tax: 32 pounds ($51) a month.

There is another difference between what the Sultan of Brunei, ruler of the oil- and gas-rich Asian nation, and the Braithwaites pay: The sultan gets a discount on his tax bill because he lives there part time. The Braithwaites don't.

The poorest 20 percent of British households pay 5.6 percent of their total income in local government council tax, three times the proportion the wealthiest 20 percent contribute, Michael Orton, a researcher at the University of Warwick, found. That disparity prompted the coalition government's Liberal Democrats to push for a so-called mansion tax of 1 percent a year for homes valued at more than 2 million pounds. Their coalition partners, the Conservative Party, rejected the idea.

"They need to pay more," said retiree Aisha Braithwaite, 68, at her kitchen table in Golborne, one of London's poorest neighborhoods. Like Billionaires Row, it's part of the Kensington and Chelsea borough.

"They say that we're in it together," Braithwaite said. "How can we be in it together when the people who can afford are not actually exposed to the same sort of crisis or stresses that we normal people are exposed to?"

Property taxes have become Britain's latest battleground over who should pay, and how much, as the country faces a record budget deficit and the government's austerity program is forcing cuts in social programs such as disability benefits and aid to families with children. In London in particular, where affluent foreign buyers have kept home prices rising even in the face of the country's first double-dip recession since the 1970s, limits on council taxes have left many lower- and middle- income renters and homeowners paying almost as much as the wealthy, and sometimes more.

"I can't for the life of me understand why anyone thinks it's OK that if you're an oligarch in a 3 million-pound house in the middle of London, you pay the same council tax as the family next door," Nick Clegg, the U.K.'s deputy prime minister and head of the Liberal Democrats, said last month.

That's happened because the property tax is based on valuations set nationwide in 1991. Taxation rates, which vary by borough, don't rise or fall with home prices, leaving them in a narrow band.

The levy "is an extremely crude tax that is extremely out of dates in terms of banding," said Paul Cheshire, professor of economic geography at the London School of Economics. "There's certainly a case for revisiting council tax and revisiting property tax in general."

Houses that were valued at more than 320,000 pounds in 1991 pay the highest rate. A home valued at that 20 years ago is now worth an average of 960,000 pounds, according to an analysis of Nationwide Building Society data by broker Knight Frank.

In Kensington and Chelsea, an area popular with London's bankers and hedge-fund managers, top-tier households will pay 2,151 pounds this year, about 25 percent less than the average top rate for England, according to the borough. In neighboring Westminster, home of the queen and Parliament, they pay a maximum of 1,369 pounds, about half the average top rate for England, according to the same document.

Other provisions in the property-tax system favor the wealthy, including discounts of as much as 50 percent for property used as a second home or left vacant.

On tree-lined Billionaires Row, Britain's most expensive street, Sultan Hassanal Bolkiah, who as Brunei's finance minister controls the nation's $30 billion sovereign-wealth fund, qualified for a 10 percent reduction in his monthly council-tax payment, according to a Freedom of Information request to the borough of Kensington and Chelsea by Bloomberg News. He was charged 1,942 pounds, or 162 pounds a month, in council tax last year, records show. The value of the property isn't publicly available.

He isn't alone in claiming a tax discount on Billionaires Row, the popular name for Kensington Palace Gardens and Palace Green. While the 31 diplomatic properties on the street pay no council tax, 18 of the 45 residences that are taxed get a discount for being a second home or unoccupied, borough records show. Two properties were charged nothing as they were empty due to construction.

Kensington has become a haven for the rich as investors, particularly from overseas, seek to protect their wealth from political, economic and financial turmoil in their home market. The average price for a house in Kensington with five or more bedrooms has gained 47 percent to 7.55 million pounds since 2007, according to researcher Lonres.com.

"A lot of high-end residential properties going up in London are simply safety-deposit boxes for offshore money," Peter Rees, planning officer at the City of London borough, said in an interview.

Overseas buyers can use a stake in their family home to win the right to live in Britain. A 250,000-pound home deposit can form part of a 1-million-pound British investment required for a high net worth investor residency application, the British Border Agency said in an e-mail. Individuals must live in the country for five consecutive years to be eligible.

The Braithwaites say they don't qualify for a reduction in their 1,553 pounds, or 130 pounds a month, in council tax.

Lakshmi Mittal, chairman and chief executive officer of Luxembourg-based ArcelorMittal, the world's largest steelmaker, was also charged his full council tax last year of 2,158 pounds, or 180 pounds a month for his house on Billionaires Row, borough records show.

Mittal, Britain's second-richest man with a net worth of $17.5 billion, according to Bloomberg's billionaires list, bought the house on Kensington Palace Gardens for 57 million pounds in 2004 from Formula One boss Bernie Ecclestone, Forbes magazine reported. The 55,000-square-foot mansion has 12 bedrooms, a pool and marble sourced from the same quarry as the Taj Mahal, the magazine said.

Spokeswomen for Bolkiah and Mittal declined to comment.

Thirty-four of 83 residences eligible for council tax at One Hyde Park, Britain's most expensive apartment complex, also qualify for 10 percent second-home discounts, the City of Westminster said in a reply to a Freedom of Information Act request by Bloomberg News.

The luxury apartments in London's Knightsbridge district were conceived by developers Christian and Nick Candy and Qatar Prime Minister Sheikh Hamad Bin Jassim's closely held Waterknights. Prices there have ranged from 5.75 million pounds for a one-bedroom home to 135 million pounds for a penthouse, the Times newspaper reported last year.

The maximum council-tax bill for any of the apartments in One Hyde Park would be 1,369 pounds — or 184 pounds less than the Braithwaites pay three miles away in Kensington.

"It's one of those anomalies that seem very hard to justify," Orton, who published a research paper on council tax in 2006, said by phone. "There aren't going to be very many people on lower and middle incomes who own a second home. It's the people on higher incomes that are again benefiting from the structure of the tax."

The poorest 20 percent of British households pay 5.6 percent of their incomes in council taxes compared with 1.8 percent for the highest earning 20 percent, according to Orton. That gap has widened over the past nine years, Orton found, using data from the government's Office for National Statistics.

"Each time council tax goes up it disproportionately affects those on middle and lower incomes," he said. "A fair system requires actually altering the ratios between the bands to make the overall system fairer."

About 0.2 percent of all British houses are valued at 2 million pounds or more, Lloyds Banking Group estimated in March, meaning about 45,000 homes would have to pay the Liberal Democrats' mansion tax if it was introduced. The tax would add a 1 percent surcharge for homes assessed at more than 2 million pounds, paid on the value above that level. An owner of a 3 million-pound home would pay 10,000 pounds more a year.

Prime Minister David Cameron opposes a mansion tax, saying people who save for a large house shouldn't be hit "every year with a massive great tax," Cameron said on Oct. 7 on BBC Television's Andrew Marr show. "That's not going to happen."

Instead, Chancellor of the Exchequer George Osborne's annual budget targeted luxury-home purchases to help narrow Britain's deficit by raising the transaction tax, known as stamp duty, on homes sold for more than 2 million pounds to 7 percent from 5 percent. He also imposed a 15 percent levy on homes purchased by companies to counter the use of offshore corporations to avoid taxes.

"Council tax is a local services tax, not a wealth tax," the Department for Communities and Local Government said in an e-mailed statement. Parliament is considering changes to give councils "greater flexibility" to remove tax relief for second and empty homes, the government said in the statement.

Council taxes are used to pay for services such as roads, social services and garbage removal. Kensington and Chelsea trimmed its budget by 22 million pounds after the British government cut funding for councils, according to its website. Its council-tax rates have changed little over three years.

"We are very interested in the government's plans to amend the discounts to council tax," said Bernard Brady, a Kensington and Chelsea Council spokesman. "The system of local government finance, including council tax, is controlled by central government; individual councils cannot change the tax system."

Aisha Braithwaite, who shares the row house with her husband, daughter and two grandchildren, has lived for two decades in Golborne, where more than a quarter of the population is on welfare, according to the Office for National Statistics.

Meanwhile, asking prices for homes in Kensington and Chelsea rose 9.1 percent to an average of 2.2 million pounds in October, making it the country's most expensive district, according to Rightmove Plc, a property website. The borough's wealth disparity makes her angry.

"I'm incensed that we're expected to tighten our belts," said Braithwaite, who worked for the City of Westminster and Hackney Borough councils before retiring. "They need to pay more because they are getting everything for nothing. Half of them don't pay tax. They've got big lawyers who can advise them how to avoid paying tax."

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