Rachel Reeves’ somewhat unprecedented pre-budget speech on 4th November seemed to pave the way for tax rise announcements at the end of the month. New challenges over the last 12 months are the backdrop to “tough choices to be made” that “we will all have to play our part in supporting”. There was a swift pulling back from the brink and clarification that a general income tax was not going to happen.
So, will it be more targeted and how will this impact the property market and its prospects for growth beyond? In his first article as CEO of tmGroup, Matt Green considers what might lie ahead.
When the Chancellor called a press conference to manage expectations of a tax rising budget, it was a surprise to many commentators that the language was immediate softened on how universal it could be. There may be a freeze in tax thresholds, which could be effective, but, in the current climate, would a more targeted tax at the perceived “wealthiest” be uncontroversial to most? And if we are entering a new higher tax era, how will this affect sentiment in the property market?
Mansion Tax to target the Wealthy?
The property market has all too frequently been an economic plaything of governments over recent decades, which has often led to massive distortions in demand from cliff-edge deadlines for SDLT thresholds. This may be repeated, but it’s the threat of a Mansion Tax which was one of the early speculations.
This could take the form of an annual supplementary tax on those properties more than £2million in value, something like an extra council tax calculated on the value above this threshold. Those just above the £2million valuation would probably not feel much difference, but it’s the psychological impact being above the line that could have the greater effect.
Properties coming to the market that would have been valued between £2-2.25 million could find themselves sheltering at £1.99 million and have a wider depressing effect on prices at that end of the market. Those at £1.75-£2million will either find they are in more demand or be put under pressure to reduce further based on the perceived better value of the newly reduced, perhaps larger properties entering their segment.
Of course, this all depends on the valuation and that raises as much speculation as the idea of a Mansion Tax. What would it be based on? Most likely an AVM, as it is unlikely we will suddenly see fleets of surveyors rushing around the country to undertake detailed building surveys where they weren’t before.
But as we know, the last year or so has been a tough market for sellers (not helped by the Government giving 3 months lead time on this year’s budget). Pricing impacts are highly localised, based on the unique facets of the area and local supply/demand for specific types of houses.
Of course, this affects a small proportion of the population, and the Labour Government could view a Mansion Tax as a calculated gamble that isn’t likely to lose them any more votes than they perhaps would have had from this segment anyway. Indeed, it may be seen by as a “wealth tax” and popular with many. But it doesn’t account for those who have inherited large, expensive properties, or just happen to live in expensive parts of London and the Southeast, where this will be felt the most. Downsizers may find their options are clipped slightly as equity is chipped away, but again this won’t affect most people.
Surgery to SDLT thresholds?
More significant could be a combination of a Mansion Tax and serious surgery to the SDLT thresholds. Many commentators view SDLT as a punitive tax on the property market, holding many back from selling and, indeed, trapping people in large houses that they would otherwise downsize from (baby boomers and a growing number of Gen X’s now being in that situation).
It’s highly unlikely SDLT will be abolished completely, and it remains a solid tax earner for the Government, but it’s insidious and suppresses growth, not just in the property market, but for the wider legal services, construction, furnishings and DIY markets. Perhaps if it were in line with the Mansion Tax and was levied at only the most expensive transactions of say, above £1 million, then the net calculation may be positive for wider UK economic growth to offset the tax loss.
Landlords in the firing line?
The buy to let market could also be further targeted to weed out the legacy armchair landlords from the last credit boom and free up housing stock for first time buyers. But this does little to reduce the pressure on rents at a time when those who can’t afford to buy property continue to suffer from the costs of living crisis. Landlords have been flooding the market in the last couple of years as reliefs, costs of compliance and the newly implemented Renters Reform Bill have weighed on their profits and operations.
The Government may view CGT rates as a justifiable target while this lump of property goes through the pipeline in the next couple of years, while depressed prices and (anticipated) cheaper mortgage rates may stimulate more first buyers back to pick up cheaper stock.
Jeanette Coughlan, Home Conveyancing Director at Connells, believes that any “Mansion Tax” could be especially punitive for the latest generation of house buyers in London, even if the intent is to target the wealthier in society:
“The introduction of a ‘mansion tax’ would represent a fundamental shift in the way property is taxed. Rather than a tax on income or a payment for services, a mansion tax is more akin to a wealth tax, levied on higher-value assets. While homes bought a generation or more ago have seen above-inflation increases in value, those bought more recently may be worth less than what their owners paid, having also handed over six-figure stamp duty bills.”
“Initially, the impact of a charge is likely to be fairly limited. Around 87% of homes liable to pay it are in the capital, and many of these will be in local authorities where council tax rates are artificially low. A Band H home in Wandsworth pays £1,995 per year in council tax, while a home in the same band in Surrey pays up to £4,965. So many inside the capital will still find themselves materially better off.
Jeanette believes that this could pave the way for more perceived “wealth” tax hikes in the future:
“The establishment of a new surcharge probably opens owners up to further tax rises in the future. Many property taxes, like stamp duty and the second home surcharge, were initially introduced at relatively low levels, before being increased by cash-hungry governments. There is always the risk that a future government sees hiking a ‘mansion tax’ as an uncontroversial way of raising tax revenue in the future.”
Looking ahead
It’s clear the market has been somewhat held back in anticipation of what may come out of the Budget, but the fundamentals haven’t changed drastically for those that have access to deposits or are sitting on reasonable equity. There has been a plateauing of house prices, especially in London and the Southeast, but there is never a “best time” to move, and 2025 transactions are on course for an average year looking at the long-term trend.
I’m not sure that for most, net-net, whether it’s cutting SDLT at the bottom end or adding a Mansion Tax at the top end, it will make a dramatic difference to the maths of moving when you balance prices agreed for quick sales vs. the gains made from any tax saving, for example.
But the property market is all about sentiment. A tax raising budget, following a period of cash tightening for many households may make house moving an expensive process, unless there is a compulsion to do so. There may be some new price/demand distortions introduced if some or all these measures come in, but the market will continue to be hyper-local.
Any cliff edge style tax changes are far more likely to have significant impacts of demand for property and legal services nationally, so we must all cross fingers that artificial “boom-bust” stresses aren’t introduced once again for the sake, especially, of conveyancers.
