How Reeves’s UK property tax changes could reshape the housing market

Here’s how the potential policies could work, and the impact they are likely to have on the property market.

1. Capital gains tax on main homes

Potential policy

Reeves is reportedly considering expanding capital gains tax (CGT) so it is charged on the profit made when someone sells their main home rather than only their second property, with officials reportedly considering setting the threshold for the tax at homes worth £1.5 million or more.

Under the rules as they stand, higher-rate taxpayers pay 24 per cent of the value of any “gain” they make from the increase in the value of assets excluding their main home, while basic-rate taxpayers pay 18 per cent.

Likely impact: asset-rich cash-poor downsizers sit tight

This is a tax that would squarely target London and the southeast. Of the 310,000 homes in England and Wales worth £1.5 million or more (representing roughly 1.1 per cent of the national housing stock), eight in ten are in these regions, the estate agency Knight Frank says.

To that effect, Savills listed the top local authorities nationally for £1.5 million-plus sales since April 2020 and found that nine of the top ten were in London.

The bill faced by a seller of a £1.5 million-plus home under such a plan would potentially be brutal, given how much equity many older owners have accumulated in recent decades. Hamptons calculates that sellers in the over-£1.5 million bracket last year gained an average £836,200 on the price they paid, often many decades ago, which would mean a higher-rate taxpayer being landed with a CGT bill of £200,000.

The danger is, then, that many asset-rich, cash-poor sellers will decide not to sell so as to avoid incurring the CGT charge — a move that would mean less downsizing and poorer choice for families wanting more space.

A survey by Savills of about 1,000 would-be sellers found that CGT would be more likely to stop them moving than any other rumoured policy, with 45 per cent saying it would have a “significant negative impact”. One way the government could mitigate the damage would be to charge CGT only on future gains, rather than on earlier ones. However, even in this case, 39 per cent of those questioned told Savills they would be less likely to move.

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Hamptons points out that a “hard” threshold of £1.5 million would create a cliff edge where a large number of owners put homes up for sale for just under this level. There would be serious questions over how to value properties for the tax, with no meaningful national council tax valuation programme having taken place since 1991 in England (and 2003 in Wales).

2. Mansion tax

Potential policy

The phrase “mansion tax” has been used as shorthand for any kind of tax grab on expensive properties. However, the version being considered now seems to be an annual 1 per cent tax on the portion of a property’s value above £2 million — a policy not dissimilar to one floated by the Liberal Democrats in its 2015 election manifesto.

Unsurprisingly, the measure would, like a CGT charge on main homes, overwhelmingly affect owners in London and the southeast. There are approximately 150,000 properties that would fall into the mansion tax bracket, and Savills says 66.6 per cent are in London, 19 per cent are in the southeast, 5.2 per cent are in the east and 4.6 per cent are in the southwest.

An analysis of local authorities by Tom Bill, Knight Frank’s UK head of research, found that 19 of the top 20 for £2 million-valued homes are in the southeast, the others being in the Cotswolds (in 18th). In Kensington and Chelsea 18.5 per cent of properties are valued at more than £2 million.

So how much more would a household pay? Even a property slightly over the £2 million mark would be hard-hit: a £2.5 million property would incur a tax bill of £5,000 a year. The average value of a £2 million-plus home is £5.1 million, Hamptons says, and a 1 per cent tax for this household would result in a bill of £31,000.

Likely impact: cliff-edges and valuation challenges

Hamptons thinks a tax of this nature could, at a stroke, devalue affected homes by between 5 and 10 per cent because of the impact of the extra liability the owner would face — and, just like a £1.5 million CGT charge, it would create a sales cliff-edge at the £2 million mark, with lots of buyers offering just beneath this. “Everyone would just buy a house priced at £1.95 million,” Sides says.

The government might argue that whacking someone who owns an expensive property with a mansion tax may encourage them to downsize faster, freeing up stock for upsizers. But will it, in practice?

Downsizing frequently comes with a huge bill if the seller wants to buy another home and, thus, pay stamp duty on it. Moving to a £1.95 million home, for example, would cost £147,750. If that’s the case, why bother?

There will be big questions over the fairness and accuracy of bills, how homes are valued, and possibly legal challenges.

3. Hit the owners of pricey homes with more council tax

Potential policy

The most recent rumour is “supercharged” council tax for the most expensive homes. This could see council tax rates double for properties in the bands G and H in England, according to the Institute for Fiscal Studies (IFS).

Other rumours include the creation of one or two new council tax bands above band H, a route that has been taken by the Welsh government, to target multimillion-pound properties.

The existing council tax bands are universally acknowledged to be unfair and inaccurate because of their old valuations.

Reeves is said to favour more targeted reform than an overhaul of the system, which is politically and administratively complex and would mean revenue doesn’t arrive at the Treasury’s door anytime soon.

Adding an extra band or two at the top end is described as highly likely by Hamptons, and “could be one of the least disruptive property tax reforms floated so far”.

Likely impact: an (even) damper market in London and the southeast

Doubling council tax for the top two bands could raise £4.2 billion by 2030, the IFS estimates, and it is likely to affect about one million homes, or 4 per cent of England’s properties.

Roughly, doubling council tax would hit homes worth more than £750,000, according to Tax Policy Associates, a website founded by the tax expert Dan Neidle. Owners of a property in band G could see their annual bill increase from £3,800 to £7,600, or £4,560 to more than £9,000 in band H.

The policy would, like many of the others, mostly hit people living in London and the southeast; 56 per cent of properties in bands G and H are in these regions, according to Savills’ analysis. Because council tax is an ongoing burden and not a transaction tax like stamp duty, it could dampen demand for properties in higher bands.

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Savills’ survey shows that 51 per cent of homeowners would be put off moving house if high-value council tax bands were added.

In the short term pensioners and asset-rich, cash-poor owners could be incentivised to sell, but there is a shortage of properties for them to downsize comfortably into. At the higher end of the lettings market the cost of increased council tax could initially be passed on to tenants in the form of higher rents. In the long term their landlords will bear the cost because it’s likely to reduce rental growth.

4. Levy national insurance on landlords’ income

Potential policy

Another policy on Hamptons’ “most likely” list is the introduction of national insurance contributions (NICs) on rental income. At the moment landlords who own property in their personal name (not through a company) pay income tax on their rental profits but don’t make NICs.

Politically this would be in line with Labour’s manifesto pledge to raise tax on assets rather than on income, but landlords are likely to be angry that they are not considered “working people” by Reeves at a time when they are facing a smorgasbord of new regulations with the passing of the Renters’ Rights Act. The proposed reform would bring rental income in line with employment income, subjecting it to NICs at a rate of 8 per cent up to £50,270 and 2 per cent thereafter.

When it proposed the tax change the think tank the Resolution Foundation estimated that it could raise £3 billion, but Hamptons suggests that 40 per cent of the UK’s landlords would be exempt, so £1 billion is a more realistic estimate.

Likely impact: more small-time landlords selling up

Younger, lower-earning landlords who own property in their name are likely to be hit hardest by the policy — unlike with George Osborne’s gradual phasing out of mortgage interest relief from 2015, which hit higher-rate taxpayers hardest. This means heavily mortgaged “accidental landlords” (who cannot sell) or people who have held on to a property to supplement a lower income or pension will be paying the most.

Hamptons’ analysis shows that a typical landlord in this position who is earning £16,478 annually and paying £7,875 in mortgage interest (based on a 5.3 per cent mortgage rate) would see their tax bill more than double, from £699 to £1,609. A higher-rate taxpayer landlord would see their bill rise from £2,973 to £3,200, leaving them £295 in profit from their buy-to-let.

The definition of profit is key. It is likely that NICs would be levied on pre-mortgage profits, although reports of this are unconfirmed by the Treasury. This could increase the chances of higher-rate taxpayers paying tax on loss-making rental properties.

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Forcing NICs on landlords will hasten the transformation of the lettings market into a more professionalised sector by encouraging them to set up companies (about 80 per cent of buy-to-let landlords own properties in their name). Transferring an existing portfolio into a company structure can incur a huge tax bill, however, so it’s likely that many landlords will sell instead, which could lead to higher rents.

5. Proportional property tax

Potential policy

Stamp duty and council tax are so unpopular that a radical idea to replace them with a single annual property tax is rumoured to be on the cards.

Campaign groups such as Fairer Share and, more recently, the economist Tim Leunig (who invented the Covid furlough scheme) from the think tank Onward have suggested a sum based on a property’s value, which would kick in after a property is bought.

The rumoured tax rate has veered about since reports that it was being considered by Reeves surfaced in August. Leunig suggested an average rate set locally by councils of 0.44 per cent and a national rate of 0.54 per cent for homes between £500,000 and £1 million, then 0.81 per cent above that value.

Fairer Share suggests a flat rate of 0.48 per cent of a property’s value (0.96 per cent for second homes), with a deferral mechanism for people who could not pay it upfront.

Council tax and stamp duty currently raise £58 billion a year for the Treasury

ANDRZEJ ROSTEK/GETTY IMAGES

Likely impact: higher bills and rents in London and the southeast, but more movement

This would simplify the property tax system and shift the burden from buyers to owners. The result, according to Leunig, would be more movement in the property market. He said: “These proposals would make it easier and cheaper to move house, for a better job, or to be near family, as well as being fairer.”

Nevertheless, it is unlikely to please those in London, where 75 per cent of property owners would face higher bills, according to Hamptons, including everyone with a house in the council tax bands G and H. Nationwide it is thought that 17 per cent of households would pay more under a 0.48 per cent tax.

Lower-income homeowners in higher-value areas can avoid stamp duty by not moving, but they would not be able to avoid an annual tax.

Landlords could conceivably pass on the cost to tenants, resulting in higher rents in London and the southeast, where property values are highest.

Together, council tax and stamp duty raise £58 billion a year for the Treasury. Fairer Share claims a proportional tax would raise an extra £5.6 billion a year for public services.

Leunig thinks the government would lose £10 billion a year initially, but that the revenue would rise eventually because of an increased number of property sales from people moving more often.

6. Abolish or replace stamp duty

Potential policy

At various points in recent history the idea of abolishing stamp duty has reared its head. Kemi Badenoch, the Conservative Party leader, most recently did so at the party conference last month. But the idea of scrapping a £11.6 billion tax with nothing to replace it isn’t happening. Instead the government is reportedly considering shifting the liability to pay the property transaction tax to sellers instead. The idea is that the tax would be paid by sellers of homes worth more than £500,000, with the amount paid determined by the value of the property. It would not replace stamp duty on second homes.

Likely impact: stopping downsizer moves

Every government in the past few years that has considered making stamp duty a sellers’ tax has come up against the same persuasive argument: that it will mean downsizers — or, indeed, many movers — not selling. This would doubly be the case if the government was to introduce CGT on pricier main homes at the same time.

If tinkering with the policy leads to a slowing of the property market, this — just as is the case with CGT — could lead to a fall in tax receipts. For the Treasury that’s undoubtedly the worst unintended consequence of all.