Sir Keir Starmer is being 'bullied' by the Treasury into introducing a mansion tax in the Budget to 'buy off' Labour Left-wingers, a No10 source has told The Mail on Sunday.
With Chancellor Rachel Reeves signalling her readiness to raise basic-rate income tax for the first time in more than 50 years, the Prime Minister has been told that charges on homes worth £2 million or more are necessary as a 'distraction tactic' in order to 'sell' the Budget on November 26 as an attack on the wealthy rather than 'working people'.
At last year's general election, Labour promised not to increase national insurance, income tax or VAT on those 'working people'.
Astonishingly, the source said that the Prime Minister had objected to a mansion tax on the grounds that it would generate negative headlines about 'little old ladies' being turfed out of their homes because they couldn't afford the levy. However, his concerns were ignored.
Torsten Bell, the Treasury minister who is effectively writing the Budget for Ms Reeves, is understood to have argued that 'some form of mansion tax has to happen'.
This newspaper revealed last month that Ms Reeves had drawn up plans for the owner of any property worth at least £2million to face a charge of 1 per cent of any value over £2million, meaning that those with a £2.5million property would face a bill of £5,000 every year (1 per cent of £500,000).
This is expected to generate a £2billion towards the £40billion hole in the public finances.
Under an alternative plan, which would raise closer to £4billion, council tax would be doubled for all homes in bands G and H – taking a typical annual bill from £3,800 to £7,600 in band G and from £4,560 to £9,120 in band H – or extra bands could be added above H, which is the top band.
On Tuesday, Ms Reeves gave a highly unusual breakfast-time speech in which she tried to justify an increase in income tax by saying 'we will all have to contribute' to strained public finances.
The prospect of such a blatant breach of Labour's manifesto pledge has alarmed already restless backbenchers.
A No10 source said: 'The Treasury is obviously worried about the reception which the Budget is going to get.
'Keir argued privately that a mansion tax would be unfair on little old ladies who lived in large houses which have increased in value over decades but who did not have the disposable income to pay a new charge.
'He also said that it would raise relatively little money in return for all the political hassle.
'But Torsten was adamant that it has to happen in order to sell it to the backbenches, and Keir has basically been bullied into agreeing.
'The Treasury hopes that if it is framed as a soak-the-rich Budget as a distraction tactic, Labour MPs will vote for it despite the manifesto breach'.
Referring to Zoopla, the online property sales platform, the source added: 'We have less than three weeks to put some sort of plan in place, which is difficult, bordering on impossible.
'The council tax valuation bands are more than 30 years out of date, so if we add levies or extra bands we could end up using some sort of souped-up Zoopla. It means Rachel might have to make some sort of statement of intent on mansion taxes, rather than announce their imminent introduction.'
Labour deputy leader Lucy Powell, who won last month's contest to succeed Angela Rayner with the support of Left-wing MPs, has warned that such a move would damage 'trust in politics'.
If Ms Reeves does raise income tax by 2p, she is expected to couple the move with a 2p cut in national insurance to shield those earning less than £50,000 from a tax increase. In an attempt to wriggle out of Labour's manifesto promise, the Treasury has privately defined 'working people' as those earning less than £45,000.
No10 did not respond to a request for comment.
