Labour considers lowering mansion tax threshold to £1.5m in Budget raid on nearly 300,000 households - including many middle-class families in London and south east

Labour is actively discussing plans to extend the so-called 'mansion tax' to properties worth more than £1.5 million ahead of next month's budget.

Up to 300,000 homes could be hit by the tax on property values, particularly in London and the south east, in a move first exclusively predicted in the Mail on Sunday.

The paper revealed on July 5 this year that new PM Andy Burnham could drag thousands of middle-class homeowners into the punitive tax by lowering its current ceiling of £2 million to £1.5 million.

This would mean householders in the new bracket and over having to pay out eye-watering four-figure sums in tax.

Ironically, the PM has previously dismissed the unpopular tax as too 'symbolic' and said it leaned into 'the politics of envy' when it was championed by failed former Labour leader Ed Miliband in 2015.

Now government sources have confirmed that the Chancellor John Healey is indeed looking at plans to widen the mansion tax - or high value council tax surcharge as it is officially known - in the run-up to his first budget on October 28.

Housing experts have warned that such a move could affect the housing market, leading to a downturn and a depressed market.

The tax was first introduced in last year's budget on homes worth more than £2 million and was expected to hit around 134,000 homes with a levy of between £2,500 and £7,500 a year. It is scheduled to come into effect in April 2028.

Labour is actively discussing lowering the 'mansion tax' threshold to £1.5million (Pictured: Andy Burnham on September 18, 2024)

Government sources have confirmed that the Chancellor John Healey is indeed looking at plans to widen the mansion tax

It comes after the Mail on Sunday exclusively revealed the new PM was going to drag thousands of middle class families into being hit by the punitive tax

Now the Chancellor is set to extend the levy to properties worth more than £1.5 million, which would more than double that number to around 271,000 homes on current property values.

Two government sources have confirmed that lowering the threshold was a 'live discussion' in the Treasury, according to today's Times.

Mr Healey is under pressure to bring in around £10 billion as government spending soars.

Lowering the mansion tax threshold could make up some £800 million of the amount needed to boost his fiscal headroom, the money needed to protect the government from future events.

Currently, escalating government spending and particularly the effects of soaring borrowing costs are believed to have reduced this headroom from £23 billion to around £5 billion, meaning he urgently needs to increase it.

With growing calls to tackle the spiralling £1 billion welfare bill a day likely to continue falling on deaf ears, tax rises are the only way forward for the Chancellor, say experts.

And wealth taxes like the mansion tax are likely to be popular with Labour's backbenchers, with one Whitehall source saying the wider mansion tax would signal a more 'aggressive' approach to taxing wealth.

'This is seen as the most viable option because the Valuation Office is already doing the work to identify the homes worth more than £2 million, so it isn't a massive change to capture those over £1.5 million,' they explained.

Meanwhile, a second source tempered their comments with a caveat that nothing had been firmly decided, as there were concerns any lowering of the tax threshold to £1.5million would hit too many more modest London properties.

It has also been reported that the government is unlikely to proceed with Andy Burnham's favoured plans to overhaul stamp duty and council tax because they would take too long and involve a huge revaluation process.

Under the mansion tax system due to start in April 2028, properties will be banded, with those worth £2 million to £2.5 million paying an annual surcharge of £2,500, rising to £7,500 for homes worth more than £5 million.

Aneisha Beveridge, the head of research at Hamptons, warned lowering the threshold would make this 'very challenging' and would further distort the housing market.

She said house prices in the £2 million plus bracket had already fallen by 6.5% as sellers sought to avoid the mansion tax threshold to attract buyers.

Lucian Cook, the head of residential research at Savills, said too many 'middle-class families through London and the south east in particular' would be hit.

Calling it no longer 'a taxation of mansions but just relatively large family homes through swathes of London as well as considerably smaller properties in the centre', he said:

'The other risk is that people whose finances are stretched may find that they need to leave the property that they live in and are very emotionally attached to. That is one of the less palatable consequences.'

And estate agent director Mark Pollack, from Aston Chase in London, said reducing the levy to £1.5 million would see many families bound by the new tax who would struggle to pay the surcharge even if it was set at a lower level than £2,500.

He hit out at what he said was 'a real misconception that this would only impact the super-wealthy' and said it could be 'the straw that breaks the camel's back' for many people who were 'only just staying above the surface' with 'rising interest rates and energy costs'.

His words are likely to concern Labour MPs in London, where 66,000 additional properties would be captured by a £1.5 million threshold.

Four London councils, Wandsworth, Kensington and Chelsea, Westminster, and Richmond, wrote to Mr Healey this week, calling for him to reconsider his plans.

In a stinging letter, they called it 'the worst idea since the window tax of 1696'. Under that tax, homeowners were charged on the basis of the number of windows they had, leading to many sealing them up to avoid a high charge.

'It is simply wrong to assume that everyone living in these homes is wealthy,' the councils warned the Chancellor.

'Many are not, and some will be forced to sell the family home simply to meet the tax. It cannot be an acceptable situation that our residents could lose their home through no fault of their own, to pay a tax that they could not have envisioned when they bought their home.'

But Arun Advani from the Centre for the Analysis of Taxation said lowering the threshold 'would make property tax rates a bit more equal'.

A Treasury spokesman said decisions on tax were 'a matter for the chancellor to set out at fiscal events, rather than routinely commenting on rumour, speculation or proposals'.

Tory leader Kemi Badenoch has previously attacked the plans as another example of Labour's 'politics of envy'.

'Andy Burnham is making the same mistakes Keir Starmer made, putting up taxes, hitting working families, when we should be cutting spending,' she told the Mail on Sunday in July.

'Labour can change their leader but the problem will always be the Labour Party and its politics of envy.'