Chancellor of the Exchequer Rachel Reeves is considering options for introducing new taxes on higher value homes in this year's Budget.
The plans have been trailed in the national press after senior ministers were informed, and would see the current exemption from capital gains tax on the sale of “primary” residences end above a certain price threshold. The Budget date has not been announced but is expected at the end of October or beginning of November.
According to The Times, higher-rate taxpayers would have to pay 24% of the value of any “gain” they make when selling from the increase in the value of their property while basic rate taxpayers would have to pay 18%. The Times says the threshold is a "live" discussion but calculates a threshold of £1.5 million would hit around 120,000 homeowners with capital gains tax bills of £199,973.
According to The Guardian, the government is separately looking at an entirely new tax on properties sold over £500,000. The Times reports government sources have rejected suggestions that the threshold would be this low, suggesting it would have to be far higher to avoid slowing the market. Previous proposals for a so-called "mansion tax" by the Liberal Democrats and Labour Party have pegged the figure at £1 million or above.
In addition, The Guardian has reported that the government is reviewing replacing stamp duty, the tax on purchasers of property, with a national annual property tax on owner-occupied properties, and looking at whether this could then replace council tax.
Senior ministers have been briefed that the tax moves could be followed by a comprehensive review of council tax.
It is thought that Reeves is also reviewing the potential for reforms to stamp duty. The tax is paid by the buyer and is set at 2% on the value of properties between £125,000 and £250,000, 5% on the part of a property between £250,001 to £925,000 and 10% on the next £575,000. Any remaining amount above £1.5 million is taxed at a 12% rate.
Some experts are already warning the mooted proposals, aimed at shoring up a continued "black hole" in the public finances, would lead owners of higher value properties to defer sales and wait for the tax to be less punitive. They say this would gum up an already slow housing market. There are also warnings that the plans would particularly hit pensioners who want to downsize.
Many experts think stamp duty itself needs to be reformed.
Jason Tebb, president of OnTheMarket, the CoStar-owned residential property portal, said: “We welcome any proposals that aim to reduce the financial barriers to home ownership. The potential reforms to stamp duty could make a meaningful difference, especially for first-time buyers and those who are constrained not by monthly mortgage affordability, but by the significant stamp duty outlay required upon completion. We support efforts that help make the home buying journey more accessible and affordable for all, but any changes must work for the whole market, which has significant regional variations in house prices.”
Stalling the market would be 'disastrous and illogical'
Speaking to CoStar News, Andrew White, head of UK residential at Colliers, said that while there is consensus that taxpayers should contribute more "you must do it logically without stalling the housing market".
White said that however the news has leaked out, the proposals are causing turmoil. "When you start hearing about major tax shifts as a house buyer or seller you are going to pause which seems unnecessary and unhelpful, particularly at the moment. On top of this, housing is particularly emotive in the UK.
“On the other hand, the total of all UK residential property is roughly £9 trillion in value, and that dwarves the stock market. It is a lot of equity that you don't want to be undermining too much because of its potential knock-on impact on the economy. To stall the market would be disastrous and illogical."
White said replacing stamp duty with an annual levy tax on properties over £500,000 would affect London and the South East most. It would also need at least a three-year timeframe to implement the technology and systems to deal with all the inevitable valuation disputes, White suggested.
"The last time valuations were updated in England was in 1991. How do you phase in stopping stamp duty and phase in a new tax quickly? A buyer or seller would clearly sit and wait. Equally if it is structured as a surplus to stamp duty it would undermine trust in the housing market. Imagine someone who has planned their retirement around a mortgage-free home suddenly facing £1,500 in extra annual costs based on a 0.3% levy on a £500,000 home. Retrospective changes like that would undermine trust in the housing market at the worst possible time.”
White also highlighted the potential knock-on effects for housing delivery. “The new-build market is already under strain from higher borrowing costs, planning delays and subdued demand. Adding further uncertainty over property taxation risks deterring both buyers and investors at the very time housing delivery is already stalling.”
Timothy Douglas, head of policy and campaigns at membership organisation for estate agents Propertymark, said in a statement: “Discussions around reforming stamp duty are welcome because it is a significant barrier to moving and getting people on the housing ladder. What’s key is that any reforms are evidence based and support first-time buyers, second-steppers and those looking to right-size.
“Economic growth can come from reducing the financial burden of stamp duty which we know increases the number of transactions, but any changes must work alongside differing property prices and the dynamic nature of our housing markets across the country.”
Daniel Austin, chief executive and co-founder at Ask Partners, warned that a new tax on homes sold for over £500,000 is a short-term fix that would do little to close the gap in public finances, stabilise the property market, or support long-term economic resilience and growth.
“If implemented, the tax risks creating an artificial ceiling on many properties around the £500,000 threshold. While this may seem like a positive development amid the current housing crisis, most first-time buyers do not enter the market at this level, and because housing operates in an upward chain, the impact would reverberate across all price points. In London, where the average home now costs nearly £700,000, the measure would hit families hardest, incentivising sellers to increase prices further in order to absorb the tax burden.
“The government is right to review the current system which does constrain the market. However, as I outlined in my recent letter to the Chancellor, the solution is not more taxes – it’s building more homes to increase supply and unlock market mobility.”
Tom Bill, head of UK residential research at Knight Frank, said one key question is when any gains would be calculated from.
"Based on the last decade, I’d be surprised if there was anything to tax at the top end of the property market given that prices in prime central London are down 20% over that time. A tax that reduced demand further would therefore also affect the prospect of future gains and could be self-defeating.
“If CGT applied from when the property was last bought, it would divide sellers into two groups – those sitting on a gain and those who are not. Anyone with a taxable gain would think twice before selling, which would reduce transaction numbers. The government seems to want a predictable flow of revenue that is skewed towards the wealthiest homeowners. That would be best achieved by re-banding council tax rather than introducing transaction taxes that change behaviour in the most discretionary part of the property market to the point they fail to raise what is intended.”
'Even speculation has ramifications'
In terms of scrapping stamp duty tax and replacing it with a new property tax, Bill said it is one of many revenue-raising ideas that will undoubtedly be floated ahead of the Budget but warned the government needs to be aware that even speculation has ramifications as people digest summer headlines.
"The impact of any new tax can only be assessed by comparing current and proposed new rates. In principle, removing barriers to social mobility like stamp duty is a positive move but you wouldn’t want to rely on the most discretionary part of the property market for a consistent flow of tax revenue as this proposal suggests. There is also a risk that such a proposal slows down the market to a greater extent in London, the economic epicentre of the country.”
The current council tax system is based on property values from 1991 and critics say that this has created an unfair system under which a house valued at £1 million pays only twice as much council tax as a house worth £80,000.
Bill said council tax reform is long overdue but any package of measures would need to be "carefully calibrated to ensure it didn’t reduce transaction numbers, particularly in the sort of high-value markets the government seems to be relying on to raise revenue".
"The practical hurdles faced by the government include a lack of bandwidth to undertake such a huge exercise, a short-term loss of stamp duty revenue and creating an electoral backlash when higher council tax bills land on people’s doormats.”