Reeves warned against property tax shake-up – 3 ways it could backfire on first-time buyers

First-time buyers could be left worse off if chancellor Rachel Reeves changes how property is taxed in a bid to target wealthy homeowners and buy-to-lets.

With the Budget less than two months away, major mortgage lender Coventry Building Society is warning proposed tax reforms could backfire on first-time buyers.

Reports suggest the chancellor is considering a number of reforms related to home buying.

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While the changes may seem targeted at wealthier homeowners and buy-to-let landlords, the ripple effects could be felt across the housing chain, making it harder for aspiring buyers to get onto the property ladder.

We look at whether now is a good time to buy a house in a separate article.

Scrapping stamp duty for buyers and replacing it with a new property tax on sellers of homes worth more than £500,000 is one idea on the table, The Guardian reported.

Plans to allow homebuyers to pay stamp duty in instalments, rather than paying it all upfront, are also being considered, according to CityAM.

Another mooted proposal included ending the capital gains tax (CGT) exemption on main residences above certain thresholds – meaning owners of higher-value homes would face large new bills when they sell – the Times reported.

Reeves is also said to be considering extending National Insurance to include the tax on rental income, in speculation also raised by the Times.

On the surface these changes don’t look like they touch first-time buyers, but the hidden consequences could be huge, warned Jonathan Stinton, head of mortgage relations at Coventry Building Society.

“When you shake the top of the ladder the impact is felt all the way down – which is why any reform has to be carefully thought through, to avoid creating problems for the people who need support the most,” he said.

How changes to property tax could hurt first-time buyers

Stamp duty

Switching stamp duty from buyers to sellers sounds like a huge win for first-time buyers because it takes a big upfront cost off the table – but it’s a hollow victory if there aren’t any homes to buy.

“If sellers at the top end of the market are hit with bigger tax bills, they may simply stay put. That could mean fewer family homes are freed up, and ultimately fewer starter homes coming onto the market. So while upfront costs may be lower, finding the right home could be harder,” said Stinton.

Alternative potential plans to allow buyers to pay stamp duty in instalments might ease the initial large, upfront cost burden for first-time buyers. But it could also saddle them with another monthly expense, making overall affordability tighter, Stinton pointed out.

Capital gains tax

Taxing main homes through CGT could turn downsizing from a smart financial move into a costly dilemma. Faced with a hefty bill, many homeowners might simply stay put – putting another squeeze on the flow of family homes on the market.It also risks weakening the Bank of Mum and Dad. Stinton said: “The money that older homeowners unlock when they downsize is often passed on to children and grandchildren to help with deposits.

“If the taxman bites a big chunk out of the proceeds of a sale, the next generation of buyers could find it harder to get the financial support they’ve been counting on.”

More than half of first-time buyers received financial help from their family to make house purchases last year, according to estimates by estate agency Savills.

An average of £55,572 was given in loans and gifts by the so-called Bank of Mum and Dad to buyers, it said.

National Insurance on rental income

Extending National Insurance to rental income could mean landlords will be faced with either passing the cost on to their tenants or selling up altogether.

On the one hand, landlords selling up may present more opportunities for people looking to get a foot on the property ladder right now.

But, for anyone trying to save up a deposit, any further reduction in the supply of rental properties is likely to put upward pressure on rents.

“And with the Renters’ Rights Bill on the horizon, some landlords may even hike rents re-emotively before rules kick in. For first-time buyers saving for a deposit, that makes it even harder to put money aside each month,” Stinton said.