Budget time always brings debate about tax and housing and what this means for decision-making on property sales volumes and values.
When it comes to tax, recent governments have focused on how to raise revenues more than focus on how the taxation of property can help drive better outcomes for the efficient functioning of the market. This would require major reforms that are politically challenging.
Instead, governments have introduced greater complexity to target taxes that hit a smaller proportion of homes but generate more revenue.
So what might the government do in this Budget and what would be the impact?
While the focus is on policies to support economic growth, they will have an eye on revenue raising to fund new investment. It’s fair to conclude that if you own more than one property you will be paying more in tax.
There are four areas to watch out for:
Stamp duty in England and Northern Ireland – stamp duty is devolved but most tax is paid in southern England. While there are many proposals put forward every year at budget time, I don’t see any major changes here with the exception of one eye-catching headline opportunity.
Stamp duty receipts have grown fast in recent years generating over £13bn a year. It’s really a tax on buying in southern England which accounts for 56% of the annual bill of which around half is paid for by people who own more than one home (those with the ‘broadest shoulders’ in political parlance).
At the other end of the spectrum half of sales pay no SDLT. For those that day stamp duty 16% of sales over £500k account for 70% of the total stamp duty bill.
The extended stamp duty relief for first-time buyers (FTB), bought in by Kwasi Kwarteng in 2022, is set to expire in March 2025. This helps the 8 in 10 FTBs looking to buy for below £425,000. There must be a good chance there is an announcement that this relief is made permanent. This would be sold as a big win for FTBs – it really benefits those looking to buy in southern England.
Council tax revaluation – there is an outside chance we could see a simple council tax revaluation. Today’s tax bands were set in 1992 and are out of date. A plain revaluation wouldn’t change much in terms of what people pay but it could unlock further reforms for the future.
Academics and economists want more widespread reforms that start to make the tax system fairer but these would represent major changes which have winners and losers that are very politically challenging.
CGT at marginal rate of tax? – One of the tax areas that wasn’t protected in the manifesto was capital gains tax (CGT) although it only brings in 2% of all tax receipts. Tax rates on earnings are roughly twice as high as those on capital gains. There is a school of thought that encourages people to hold onto assets, re-enforced by no capital gains when a person dies. Media speculation suggests that tax rates for capital gains could align with what a person pays on income. Thus sales of residential property could see CGT increase from 24% for higher-rate tax payers to 45%.
In the last tax year, 120,000 people sold 132,000 residential properties with an average capital gain of £50,000 on which they paid an average of £11,000 in CGT. This amounted to £1.5bn in tax on residential disposals. Moving to the marginal rate of tax would see CGT from residential disposals likely double to £3bn. Small by comparison to stamp duty but more meaningful and an extra cost for investors and second homeowners.
Investors have been hit by a succession of tax changes since 2016 and this is another in a long list of factors influencing decisions on whether to buy or sell. Second homeowners are responding to a doubling in council tax from 2025 and speculation over higher CGT rates with second home hotspots seeing homes for sale grow 4x faster than the rest of the market.
Untouchable – CGT on main residence? – one of the biggest tax breaks in the UK, and many western countries, is no tax on the capital gains made for your main residence. In the UK the Government estimates it’s worth over £36bn a year. This definitely fits in the wider reforms category and seems untouchable. It remains a big tax break that supports home ownership.
Overall it’s people with more than one property and those in southern England that will continue to pay the lion’s share of transaction and disposal-related taxes.
However, before crying out too loudly, those living in southern England benefit greatly from the way council tax operates. Any reforms to council tax would see people in southern England pay more as bills fall in lower-value markets. The tax system like everything is far from perfect.
Richard Donnell is executive director of Zoopla
