The government has zeroed in on the top end of the residential market in today's Budget – its annual fiscal policy address – with the introduction of an annual surcharge that could impact capital flows into England, as well as valuations.
The high value council tax surcharge is being introduced in England and will apply to properties valued at over £2 million, Chancellor Rachel Reeves announced in the 2025 Autumn Budget statement.
Due to be implemented in April 2028, the measures are aimed at raising a projected £0.4 billion annually in 2029-30 from the tax that will apply to the top 1% of properties. Revenues from the tax will be directed into central government instead of into local authorities.
“A band D home in Darlington or Blackpool pays just under £2,400 in council tax, nearly £300 more than a £10 million mansion in Mayfair,” said Reeves in the statement.
There will be four price bands starting with a £2,500 surcharge for a property valued in the lowest band of £2 million to £2.5 million, to £7,500 for a property valued in the highest band of £5 million or above, all uprated by consumer price index inflation each year.
For owners, investors, developers and advisers active in prime markets, the policy marks recalibration of long-term cost structures and could cause a shift in pricing strategies across the high-end residential market.
Market implications
This has sparked concerns for the future of valuations in the sector as the cost risks being transferred to buyers over time, analysis by the Office for Budget Responsibility shows.
The key concerns cited by the OBR included price bunching where owners, investors and developers may look to value properties under the thresholds, creating a backlog of properties and a lack of pricing spread.
“This slightly reduces the estimated yield by reducing the number of properties in scope of the measure and moving properties into lower charging bands. It also results in lower yield from other property taxes (including stamp duty land tax and capital gains tax)…," the OBR said in its analysis.
Despite clear headline numbers, the operational details of the changes remain subject to consultation and therefore have resulted in some uncertainty surrounding details including the scope of reliefs, the design of an appeals process and support mechanisms.
“This costing assumes that some current council tax exemptions will apply and that there will be a deferral scheme for those unable to pay immediately. However, the government has announced a consultation on the details of the reliefs and exemptions, the design of an appeals system, and the deferral and support mechanisms that will be available. Should the outcome of this consultation materially affect the expected yield of this measure we will adjust the costing at a future fiscal event,” the OBR added in the documents.
Industry reaction
This has also sparked concerns within the market as a lack of certainty could pose a threat to both planning and investment.
Olivia Harris, chief executive of Dolphin Living, part of independent charity Dolphin Square Charitable Foundation which was established with an endowment of £120 million in 2005, said: “The introduction of a 'Mansion Tax' on homes above £2 million offers an opportunity to support affordable housing delivery across London, but only if local authorities have the ability to retain the revenue to spend on affordable housing delivery.”
The organisation, which owns over 800 homes for rent in London, has over 70% of its homes let at intermediate rents, with the remaining portion dedicated to acute housing need or market rent. It cited concerns over the redirection of funds into central government as opposed to back into the local authorities.
“As such, the government urgently needs to reconsider its position of directing this additional revenue back to the Treasury and ensure this tax on expensive housing is redirected towards delivering more affordable housing in locations where high value housing is prevalent and affordability challenges are greatest,” Harris added.
Similar concerns around uncertainty have been reflected in the legal sector, as Simon Main, partner at top 100 UK law firm Cripps, said: “It is clear that the government’s ‘mansion tax’ will have a significant impact on the pricing, liquidity, and long-term ownership strategies in the prime central London market.
“From a legal perspective, much remains uncertain. Key questions, such as how properties will be valued, who will carry out the valuations, and who will bear the costs, suggest the application of any such levy will be fraught with difficulties.”
Others in the legal sector were markedly more positive and seemed less worried about the potential impact of council tax changes on property purchases.
Sarah Conibeere, partner at law firm Fladgate, said: “In our experience levels of council tax have no real impact on people’s decisions to purchase a property and are just seen as a generic running cost, such as utility bills. Given the rating values were last reviewed in 1991 this does not seem a particularly unfair adjustment. On average council tax in London is around £2,500 per annum – now a higher level of council tax will be charged on properties valued over £2 million from 2028. At this point, we do not know how the new property valuations will be calculated and what the new ‘high value council tax surcharge’ will actually be, but it will not act as a deterrent to high-net-worth/ultra high-net-worth clients purchasing in prime central London.
“Additionally, given that stamp duty land tax or capital gains tax do not seem to have been touched, the fear factors currently holding back the prime central London market have fallen away and we anticipate a busy end of year.
Some suggested revisions to the tax to reflect the higher property prices in key prime markets such as London. Michael Shapiro, commercial property partner at law firm Spencer West said: “The thresholds presented by the Chancellor mean there could be inequity. In some areas of the country, £2 million would buy a nice country house befitting of the term “mansion”, but in central London, you might only expect a two to three-bedroom flat in a mansion block.
“My view is that regulations would need to be adapted to reflect the higher value property market in London and other high-value areas of the country. This surcharge comes into effect in 2028, so we await further clarity as to whether the 'mansion tax' is a one-size-fits-all approach.”
While major investors stated relief about the end to uncertainty in the run-up to the Budget announcement, overall some stated opportunities were misses such as UK real estate investor Edmond de Rothschild REIM. DJ Dhananjai, chief investment officer, (UK), said: “More than anything, investors will be glad the Budget has been and gone. Nothing halts investment activity more than uncertainty, and we’ve had months of it.
“With the government recently doubling down on its housebuilding ambitions, today’s Budget was a missed opportunity to reinstate Multiple Dwellings Relief, a policy which zero-rated stamp duty on the bulk acquisition of apartment buildings – which previously supported large scale institutional investment. There is evidence that, since its abolition in June 2024, investment in sectors such as build-to-rent has slowed down, dropping by 22% during the first half of this year. At a time of urgent need for more purpose-built accommodation to cater for Generation Rent, reinstatement of MDR would have been a welcome boost to the sector.”
He added: “Compounding these problems is the fact that ground-up development remains risky due to the UK’s sclerotic planning system and regulatory uncertainty. Today’s forecast from the OBR expects net additions to the UK housing stock to fall to a low of 215,000 in 2026-27, from an average 260,000 per year in the early 2020s.”
For some agents, the reaction was tempered. Richard Freshwater, director at Cambridgeshire based residential, commercial and rural land and property adviser and auctioneer firm Cheffins said: "For years, residential property has been an easy target for governments looking to line the coffers and Reeves had no choice but to introduce a tax which was aimed at the wealthiest members of society. The so-called ‘Mansion Tax’, the increase in council tax on homes worth £2 million or more, will almost certainly cause a slowdown at the very top end and this will ripple downwards and affect the pace of activity across the wider market. It is likely to also cause a pinch point for deals at the £2 million mark.
“However, as the tax changes are nowhere near as ferocious as first expected, I believe we will now see an uptick in activity throughout the rest of the market. Yes, this announcement will affect the asset rich and cash poor members of society, perhaps those who have inherited a house at over the £2 million mark, however, it is difficult to argue that local authorities were not in need of an urgent cash injection.
He added that while activity has taken in the run-up to the Budget, activity should return as confidence grows.
“I would hope that we will now see a new lease of life for the majority of buyers and sellers. With new rules on inheritance tax, gifting and the removal of the residence nil-rate band, we may also see a wave of downsizers bringing high-value homes to the market,” he said. “…Earlier announcements suggested a major overhaul of the stamp duty system and capital gains taxes on higher value homes, however, what has been announced today, at this point, appears to be far more restrained. While corporates, pension funds and the agricultural sector have taken a noticeable hit, the property market has emerged relatively unscathed.”
The task of implementing the tax will provide significant challenges, industry experts said.
Alexander Marcham, managing director at Alvarez & Marsal Tax, said: “Current Council Tax bandings are still based on 1991 values, which often bear little resemblance to today’s market. Delivering this reform as planned would effectively require a full revaluation of every property in the country to 2026 levels – a huge administrative task that likely explains why implementation has been pushed to 2028.
“Even the OBR acknowledges the risk of widespread behavioural responses and a flood of appeals. One local council officer recently told me that a surge in appeals at this scale could ‘break the national valuation system’ - and that risk cannot be taken lightly. For a government seeking growth, a policy that could overwhelm the valuation system and further freeze a fragile housing market looks like a very high price for very limited gain.”
