How likely are property tax reforms in the Autumn budget?
Rumours have been swirling in Westminster about a variety of property tax changes Rachel Reeves might introduce in this Autumn’s – or further down the line – in an attempt to plug a £40bn gap in the nation’s finances while overhauling a complex system of levies and charges.
The Treasury is reportedly looking into a range of options, including a national property tax on the sale of homes, a local annual property tax based on property values, and an introduction of capital gains tax on the sale of homes over £1.5m.
It is also considering a levy on landlords’ rental income in the hope of raising £2bn.
A new report from Capital Economics has suggested that this national insurance tax on landlords is the most likely of the bunch, with a capital gains addition for large houses – a ‘mansion tax’ – the least likely.
Capital Economics said that a mansion tax would have a negative effect on revenue, as well as being politically unpalatable and likely to “gum up” the housing market.
A tax on landlords, meanwhile, would raise “up to £2.2bn”, as well as politically popular with voters. However, analysts note that it would reduce household incomes as landlords price in the levy.
As for replacing stamp duty land tax and council tax with alternative property taxes, Capital argues that tax take in the short term would fall and take around 10-20 years to recover, making it an unlikely choice.
“The practicalities of administering an annual tax on property and the initial fall in tax revenue may mean it doesn’t make it off the drawing board,” analysts said.
What do UK property taxes look like at the moment?
The UK has two major property taxes at the moment: Stamp Duty and Council tax. Landlords’ rental incomes are not charged national insurance.
Reports from thinktanks have long called for the reform of Stamp Duty and Council tax, arguing that they stymie the property market and disproportionately affect first-time buyers and owners at the lower end of the property market.
Council tax bands are based on valuations from the 1990s, and significant house price growth since then – particularly in major cities – has led to some owners of multi-million pound properties paying similar rates to those who own terraced houses in small towns.
Stamp duty, meanwhile, has long been described as discouraging geographic mobility and making it more difficult for prospective first-time buyers to move into home ownership by adding to the upfront cost of purchasing their first property. It has been described as “Britain’s most hated tax” and has critics across the political spectrum.
“Reforms in property tax are…cautiously welcomed,” head of policy at Propertymark, Timothy Douglas, said.
“The deposit and the stamp duty are two of the main barriers of people to getting on the housing ladder and moving.”
But any reform to the tax system would be, at best, politically challenging – as evidenced by the strong reaction to rumours of changes over the last few days.
For those who already own homes and have paid stamp duty, any further taxes “will feel like a wealth tax penalising those who’ve worked hard for their home”, Nima Ghasri, director at Good Move, said.
What exactly is being discussed?
So far, there are four taxes under the microscope, with a further spate of reforms to homebuying and selling likely but as yet undisclosed.
The first is a potential ‘mansion tax’ on the sale of homes over £1.5m.
The change, which could be introduced at this year’s Autumn Budget, would see higher-rate taxpayers pay 24 per cent of the value of any gain they make from the increase in the value of their property, while basic rate taxpayers would have to pay 18 per cent.
Officials believe that a threshold of £1.5m would hit around 120,000 homeowners who are higher-rate taxpayers with capital gains tax bills of £199,973.
The second is a national property tax, which would replace stamp duty and apply to the sale of homes above a certain threshold (reports of a destabilising £500,000 threshold have been debunked for now).
The tax would be paid by owner-occupiers on houses – likely to affect the middle-to-high end of the market – when they sell their home.
It would, like capital gains, be determined by the value of the property, with the rate set by central government, which would then directly collect the proceeds via HMRC. It would not replace stamp duty on second homes.
The third is a local property tax, which would possibly replace council tax.
The annual tax would be paid by the owner, based on the property value, with a minimum payment to avoid excessively low tax take.
Various numbers have been bandied about in think tank reports over the past decade, but a rate of around 0.44 per cent – meaning the owner of a £500,000 property would pay £2,200 a year – would be likely.
The final tax is a levy on landlords’ rental incomes: The Chancellor is examining proposals for applying national insurance (NI) to rental income in the hope of raising £2bn.
Net property income totalled £27bn from 2.2m people in 2022-23, according to official figures. An extra levy of 8 per cent would have generated £2.18bn.
But any change is likely to pile pressure on private landlords, which have seen their rental yields drop significantly since 2017 – although they make up around 84 per cent of the UK rental market.
London is likely to disproportionately suffer
Any change to property taxes is likely to disproportionately affect London, which has much higher house prices compared to the rest of the country.
“London already runs the risk of becoming an ageing city, with young professionals moving out of London due to its high house prices and surging rental costs,” Peter Graham, partner and tax lead for real estate and construction at RSM UK, said.
“We could therefore see a slowdown in London transactions, with sellers delaying moving or downsizing to avoid being hit by [a] tax.”
London has a house price to earnings ratio of 8.22, making it one of the least affordable places to live in the country, against a national ratio of 6.55.
The average price of a home in the UK was £272,664 in July, according to Nationwide. In London, the average price is around £550,000.
“The reality is that [a property levy] would disproportionately affect ordinary homeowners in London… [it] risks being seen as a direct tax on London sellers, rather than a fair rebalancing of the system,” Marc von Grundherr, Director of Benham and Reeves, said.
Any introduction of a tax threshold, too, would push prices in London up faster than in the rest of the country as homeowners price new costs in.
“Higher-value properties, particularly in London and key regional cities, such as Manchester, may see the fastest capital appreciation,” Oli Banks, co-founder of North Property Group, said.
Downsizing would be discouraged
The UK has a particular issue with downsizing – over four in 10 homeowners aged 65 and over live in homes that are larger than necessary, according to a Zoopla report.
The imposition of any selling tax is a “massive disincentive” to downsize, Heather Powell, a partner at audit, tax and business advisory firm, Blick Rothenberg, said, “especially if they are managing their estate to ensure that they will not have a liability to Inheritance Tax”.
“Why would parents volunteer to pay a Property Tax on the sale of their property, and reduce the legacy they leave their children?”
Enabling people to downsize is important to free up extra stock in the middle of the housing market – Brits staying in homes too large for them prevents families from finding suitable homes to move to.
The lack of downsizing options has led to a significant number of surplus bedrooms that are underutilized in the country.
Propertymark’s Douglas added that we “need to have more focus” on downsizing.
“It’s about getting that balance… and not kicking large properties that [Brits have] had to work hard… to live in,” he said.
Will the threat of taxes lead to a flurry of activity?
There are concerns that rumours of property taxes will distort the housing market ahead of the Autumn budget.
“Don’t fly kites like this. It is really destabilising for the property market. And when I say the property market, I mean people’s homes and their mortgages and homes affect their relationships, their jobs, their education, their well being in almost every way you can think of,” television presenter and property expert Kirstie Allsopp told Times Radio.
“It’s not the place to fly kites… this government seems to want to punish people for making the sacrifices they’ve made to buy their own homes.”
But Douglas said the chatter is unlikely to affect market sentiment in the short term.
“It’s already a buyer’s market,” he said. “People at the high end are cautious, and sellers are trying to get as much money as they can”.
A ‘welcome’ move away from stamp duty
Much of the criticism on property taxes at this stage has concerned the possibility of a threshold, which would lead to a cluster of activity below the line and a sharp increase in house prices which fall obviously above the line as sellers price in costs.
“The government must ensure that any replacement does not simply shift the burden unfairly onto one part of the country, or create unintended consequences for house price inflation in a market already constrained by supply… [but] a move away from stamp duty would be welcomed,” von Grundherr said.
Emily Williams, director of Savills Residential Research, agreed that “taxation reform that removes barriers to moving would be welcome” although similarly said that government “should be careful, both in design and implementation, that any changes don’t disrupt the current market recovery”.
Douglas, too, cautiously welcomed property tax reforms, while still emphasising the need for dynamic thresholds to support first-time buyers and second steppers.
“We just want to make sure that [through] any future changeswe don’t want to restrict anyone wanting to move.”