REVEALED: Secret new mansion tax plan to hammer £1m homeowners

• Chancellor George Osborne and Deputy Prime Minister Nick Clegg are backing plans for £2 billion 'backdoor mansion tax'
• Pair have agreed plan in return for freezing welfare benefits
• David Cameron and Communities Secretary Eric Pickles resisting the move
• Prime Minister fears he will be accused of another U-turn

By Simon Walters And Glen Owen

PUBLISHED: 19:22 EST, 17 November 2012 | UPDATED: 19:22 EST, 17 November 2012

George Osborne and Nick Clegg have drawn up secret plans for a £2 billion ‘backdoor mansion tax’ which will clobber prosperous parts of Britain.

The Chancellor is ready to give in to Deputy Prime Minister Mr Clegg’s demands for new council tax bands on homes worth more than £1 million – in return for freezing welfare benefits.

But in a damaging Coalition split, David Cameron is resisting the move, fearing he will be accused of another U-turn and of hammering Tory voters in Middle England.

The Prime Minister is backed by Communities Secretary Eric Pickles, who is in charge of council tax. He has destroyed computer records of council tax valuations in a ‘scorched earth’ bid to sabotage the plan.

Split: Chancellor George Osborne, left, and Nick Clegg, right, back the plan for new council tax bands but face resistance from David Cameron and Eric Pickles

Under the Osborne-Clegg proposals, there would be two or three new council tax bands on homes worth over £1 million.

The Liberal Democrats are pushing for one of the bands, applying to properties worth more than £2 million, to target the super rich by acting as a ‘levy’ equivalent to one per cent of the value of their home each year.

Such a move would be likely to prove highly controversial because, for example, it would mean that a billionaire such as steel magnate Lakshmi Mittal, who owns a super-luxury £250 million house dubbed the Taj Mittal in London’s Kensington, would find his council tax bill rising from the current £2,151.44  a year for the Band H property to £2.5 million.

Mr Osborne and Mr Clegg want to unveil the ‘backdoor mansion tax’ and welfare freeze in the Chancellor’s Autumn Statement on December 5.

The Coalition trade-off is designed to show that rich and poor are both being forced to share the pain of clearing the nation’s £126 billion deficit. The two men tried to include a similar tax on expensive properties in the Budget earlier this year, but it was vetoed by a nervous Mr Cameron.

No 10 denies the PM has changed his mind about the plan. ‘The Prime Minister is not a fan of property taxes,’ said a well-placed source.

But, extraordinarily, other sources claim Mr Clegg and Mr Osborne are conducting their negotiations outside of the formal ‘Quad’, the key decision-making meetings held between Mr Osborne, Mr Cameron, Mr Clegg and Chief Secretary to the Treasury Danny Alexander.

This time, with an even more pressing need for Government savings, Mr Clegg and Mr Osborne believe they have a better chance of forcing it through.

New bands: Under the Osborne-Clegg plan there would be two or three new council tax bands on homes worth over £1 million

The Tories say a welfare freeze, saving a matching £2 billion a year, is essential to avoid claims that people on benefits are better off than those in work, many of whom have had their pay frozen – or cut.

The Lib Dems say they will block the welfare freeze – unless Mr Cameron finally agrees to a form of mansion tax, first put forward by Lib Dem Cabinet heavyweight Vince Cable.

Critics of the new council tax bands say the move is inequitable and impractical. It would involve revaluing homes in the current top bands, G and H, but not others. They say this is unfair because the price of homes in the provinces, such as Shropshire or Lincolnshire, has been overtaken by homes in London and the Home Counties, where they have soared since the last council tax revaluation in 1991.

Currently, homes are divided into eight tax bands, ranging from Band A (homes worth £40,000 in 1991) to Band H (£320,001 and above in 1991).

In London, which would be hit disproportionately hard by the measure, a typical £1 million house is placed in Band G, the second highest, based on its 1991 value of £265,000. The top band, H, starts on average, for houses worth £1.2 million. In the local authority which last year had the highest council tax, Richmond upon Thames, the taxes charged range from £1,062 for Band A properties to £3,188 for Band H.

Right-winger Mr Pickles is vehemently opposed to the council tax shake-up. When he took office in 2010, he scrapped the Valuation Office Agency Database, containing house values – which his aides had dubbed the ‘Mansion Tax Database’ – on the grounds of budget cuts. But it was widely interpreted as an attempt to thwart Mr Clegg.

He argues that it would be particularly unfair to elderly people on low incomes in big houses and those who have bought homes with hard-earned cash. He also says a revaluation would cost around £260 million, see ‘snoopers’ going into homes to revalue them, and take three years to implement fully, with the first bills going out in April 2015 – a month before the May 2015 General Election.

He argues that this would ‘hammer the aspirational vote’ and lead to gross geographical discrimination because of varying regional trends in property prices.

Opponents of the move also say that it makes a mockery of vows by Mr Cameron and Mr Osborne NOT to introduce a mansion tax.

Target: The type of £1 million-plus home that could be hit by the proposals

Mr Osborne’s allies deny it is a mansion tax, arguing it is ‘an extension of the council tax’.

A Tory source said: ‘It is untrue to call this a mansion tax. It will not be popular with some of our supporters but we have always said the well-off will pay more tax. No one could claim we are being unfair on the rich if we manage to freeze welfare benefits. The Coalition is about compromises.’

Mr Clegg sees it as a chance to restore his standing with his party after his U-turn on university  tuition fees. One Lib Dem MP said: ‘A mansion tax would be a legacy Nick could be proud of.’

Mr Osborne told The Mail on Sunday as recently as last month: ‘We are not going to have a mansion tax, or a new tax that is a percentage value of people’s properties.

‘Before the Election they will call it a mansion tax, but people will wake up the day after the Election and discover suddenly their more modest home has been labelled a mansion. We don’t think people who have worked hard, saved up to buy a home, should be clobbered with a mansion tax.’

He dismissed a new council tax band for big houses as a ‘tax snoopers’ charter’, adding: ‘You would have to send inspectors out and it wouldn’t raise much money. I’m not going to let the tax inspectors get their foot in the door.’

The first hint of a U-turn came when Mr Cameron said last month: ‘We are going to take further action to make sure the wealthiest people in our country pay their fair share towards deficit reduction.’

Tory MP David Ruffley told The Mail on Sunday: ‘A freeze in welfare is long overdue but it is wrong for the Lib Dems to use it to demand any kind of mansion tax. David Cameron is right to resist it.’

But fellow MP Kwasi Kwarteng, who runs the Tory Free Enterprise Group, backs the Osborne-Clegg council tax plan. ‘The driving force behind this is that we want to see a benefit freeze,’ he said.