In early August, the Italian government approved a 40% windfall tax on banks, with proceeds used to help struggling mortgage holders.

Italy is the latest country to introduce such a measure — the Spanish government approved a similar scheme back in November 2022.

The question is: would a bank levy work in the UK?

There are certainly parallels; banks here have enjoyed bumper profits similar to those of their Spanish and Italian counterparts. At the same time, those with mortgages are being hit with rising interest rates on top of a cost-of-living crisis.

There have already been calls for action on these shores. Late last year, former Bank of England deputy governor Charlie Bean suggested a windfall tax on UK banks.

And, in late June 2023, ex-shadow chancellor and Labour MP John McDonnell explained that, if the UK’s big five banks were required to pay a windfall tax, this could fund a mortgage interest relief scheme of £5.5bn for 2022 — and likely a greater amount in 2023, given that a 15% tax on first-quarter 2023 profits alone would be £3bn.

Significantly, however, a levy on banks is not official Labour policy, nor has the Conservative government ever hinted at such a measure.

But looking beyond the confines of Westminster, what does the industry think about a tax on banks?

Yellow Brick Mortgages managing director Stephen Perkins supports the idea.

“Would it help and be welcome? Yes. Will it happen? No. There is no chance at all of the UK government imposing any windfall tax on its banking chums.”

He adds: “The government barely taxed unprecedented levels of excess profits from energy companies to help households heat their homes or keep the lights on, and that was with high levels of public and opposition party support for such measures.”

JLM Mortgage Services group director Sebastian Murphy thinks there is a disconnect between the theory and practicalities of a levy.

“A windfall tax on banks to help mortgage holders seems an excellent idea, especially given the enormous increases in profits we have seen of late. However, might this backfire and simply prolong the economic agony?

“Increasing mortgage rates is supposed to restrict affordability and money supply and therefore reduce spending and bring down inflation. If we use a windfall tax to help mortgage borrowers, we are being both anti-inflationary and inflationary at the same time.”

Murphy says there is no doubt high interest rates and inflation have created a huge cost-of-living crisis.

“However, we should remember that interest rate increases are by their nature a slow fix.

“Many homeowners do not have a mortgage and most of those who do are locked in to a fixed rate. High rates will not affect these groups.

“Perhaps we should use a windfall tax to help society in a wider sense rather than just those homeowners with mortgages who are unlucky enough to be coming to the end of their fixed rate. Otherwise, we may regret helping one group to the detriment of everyone.”

Danger of bailouts

SelfEmployedMortgageHub.com founder Graham Cox echoes this sentiment.

“We all love to hate the banks, and heaven knows they give us good reason at times, but I think this would actually be a terrible idea. We’re in danger of becoming hooked on perpetual bailouts”.

He adds: “My main objection though is how financial support for homeowners will distort the housing market once more. It would be best all around if we let house prices drop to affordable levels, rather than artificially boosting them. But secondly, why should mortgage borrowers get a bailout, but not tenants? The latter are seeing huge rent increases, where’s the help for them?

EHF Mortgages managing director Justin Moy believes that as a headline grabber, this sounds like a great idea, but in reality, its a policy that contradicts what the base rate increases are trying to do.

“Putting money back into the same arena that the government are desperately trying to squeeze doesn’t make fiscal sense. There are other tools available to help borrowers, such as the ability to swap to interest only for a period, which will help more in the short term, or simply to spread the increase through taxation such as VAT, so that more of the population shoulder the responsibility of inflation, not just the poor mortgage holders.

Moy is also keen to highlight the fact that vast amounts of UK pension holders will have significant funds invested in banking stocks, so to tax them in this fashion will probably have a knock-on effect on pension values, causing another problem down the road.

Visionary Finance managing director Hiten Ganatra is another who questions the practicalities of a windfall tax.

“Regarding those proposing a windfall tax, I am not sure how they would determine the support needed for mortgage holders. For example, what would the scheme look like and how would they ensure the money was used effectively?”

Ganatra also thinks record soaring bank profits may be a short-term rather than long-term trend.

“If the housing market is impacted by higher borrowing costs, banks could see higher levels of defaults, which will invariably impact their balance sheet and profitability. We are already seeing this in the buy-to-let sector, as reported recently by UK Finance.”

The trade association stated in August that the number of buy-to-let mortgages in arrears had jumped 28% in the three months to the end of June, and 59% compared to the same time last year. The worry is that residential mortgages will follow this trend.

Ganatra sees little mileage in the windfall tax option and argues that we cannot expect these sorts of profit figures from banks to become the norm. Once the volatility and inflation settle, things will return to normality, he believes.

Just Mortgages national operations director John Phillips sees scant merit in a bank tax — nor does he think it likely.

“While our economy isn’t exactly in its finest form, the Italian economy is in a really poor state. It’s a similar story for the likes of Spain and Lithuania, which have introduced comparable measures. I don’t see the UK government stepping in to do this. In fact, I can hear the City screaming now at the thought of it!”

Phillips would much rather see the government introduce tangible support to help those buying their first property.

Bringing back schemes such as Help to Buy — or a form of it — would be a great start, he suggests, especially if they were expanded to include second-hand properties.

Election winner?

The general consensus is that the case for a bank levy doesn’t really stack up. But as we move closer towards an election (and the possibility that interest rates do not fall as hoped) might a levy prove a handy sweetener to tempt undecided voters?

Barnsdale Financial Management adviser  Scott Taylor-Barr thinks the temptation is certainly there.

“With an election looming, any of the parties may see a proposed bank windfall tax as a vote winner. There are several issues at play though; do banks just overprovision in other accounting areas, like bad debts, to ‘hide’ profits and then reprovision later and move the money back to the bottom line (and then pay it out to shareholders) once no one is looking?”

He concludes: “And if there was a windfall tax; what would happen to that money? Is it passed back to the public stoking inflation further, or does it just vanish into government coffers with no obvious benefit to the public?

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