UK regions where property tax proposals could hit homeowners hardest

Chancellor Rachel Reeves’ rumoured plans for a so-called mansion tax are already having an impact on the higher end of the property market despite no certainty that the changes will be introduced.

Reeves has reportedly been considering an overhaul of property taxes to balance the books in her much-anticipated Autumn Budget next month.

She is reported to be considering replacing stamp duty with a new national property tax on the sale of homes worth more than £500,000 and introducing a form of a mansion tax for homes by introducing a capital gains tax charge on properties that sell for more than £1.5 million.

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Further reports in the Daily Telegraph have suggested the chancellor could introduce a regular 1% charge on homes worth above £2 million.

Nothing has been confirmed and the Treasury hasn’t commented but there are already signs that the rumours are hitting the property market.

Property website Zoopla has warned that Budget uncertainty and speculation over property tax reforms are acting as a drag on sales, especially for homes priced above £500,000.

Estate agents say they have also seen a change in activity.

Dominic Agace, chief executive of estate agency brand Winkworth, said: "The government is driving away the wealth generators in our country. Speculation of this kind has already affected the market and it’s hard not to see how such a tax won’t cause wealth destruction. It is particularly unfair for those in London where it’s not all uber wealthy people who own these houses.

"Many families in these houses have significant mortgages and are already tackling mortgages that have more than doubled as interest rates have increased. They have already paid significant stamp duty too.”

The threat of a mansion tax could be good for those looking to move up the ladder if it causes prices to drop below wherever the threshold is set.

But there are warnings that shifting stamp duty to sellers and introducing a mansion tax would reduce the incentive for people to downsize and further restrict supply.

This could push up house prices further.

There will also be a big regional divide as the changes would have more of an impact in the south of England and London where property prices tend to be higher.

Which regions could be worst-hit by a national property tax?

Rightmove data suggests that just under a third of homes for sale in England are priced at above £500,000, and would be subject to the proposed new annual property tax, which would replace stamp duty if the policy came into force.

Homeowners in London would be the worst hit, with 59% of homes in the capital currently listed with an asking price of more than £500,000.

In contrast, just 8% of listings in the North East of England are above the £500,000 threshold.

The tax may not even attract as much as the Treasury hopes for.

A fifth of agreed property sales so far this year in England have been for homes over £500,000, Rightmove said, with 52% in London and just 4% in the North East.

How a mansion tax would hit homeowners

Currently, homeowners don’t pay any capital gains tax when selling their main property.

But one policy rumour is that the Treasury is considering applying capital gains tax when home sales reach above £1.5 million.

This would mean these sellers are treated the same as those selling an investment property.

The policy may be a winner with left-wing voters but Rightmove data shows just over 1% of all home sales agreed this year have been for properties worth above £1.5 million.

In London, one in ten (11%) of homes for sale are in this price bracket, with 5% of agreed sales so far this year being for homes above £1.5 million.

In the South West, 0.7% of agreed sales are in the £1.5 million price band, with 2% of available homes for sale in this price bracket.

In the North East, just 0.1% of agreed sales are in this upper-end bracket, with only 0.5% of all properties available for sale priced at over £1.5 million.

There are also reports that there could be an annual charge on high value homes, which may incentivise older homeowners to sell-up and downsize.

Laith Khalaf, head of investment analysis at AJ Bell, said the wealthiest would be hardest hit by charging CGT on high-value properties but there would likely be a knock-on effect for middle income families because anyone with a big tax liability may opt to sit tight in their property, causing a log jam in the housing ladder below them.

He said: “It’s far from certain that such tax changes will take place, but if they do, much will depend on the precise threshold at which CGT becomes payable in terms of the number of people affected.

“Even if such a ‘mansion tax’ is set at a high level, it would naturally cause people on middle incomes to worry it was just the thin end of the wedge, and the next time the government needs a bit of money they could just lower the threshold.

“Homeowners would also need to keep records of the costs of improvements they made to properties in order to offset them against any capital gains tax. That would be the case even for those with properties under the threshold, in case one day those houses grow in value enough to be drawn into taxation.”

How should homeowners react to proposed property tax changes?

For now, claims of property tax changes are just speculation.

Experts are warning against rushing into decisions based on rumours.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said it’s vital not to be driven into doing anything you wouldn’t otherwise consider.

She said: “If you’re worried about tax on downsizing, the key again is not to rush into anything. Downsizing is a major life change, involving all sorts of compromises and changes, and shouldn’t be rushed before you’re ready for it.

"This is your home, and you need to be happy in it. Ask yourself if you would be considering the move if it wasn’t for the rumours, and how you would feel if nothing ended up changing. That should help you decide if it’s right for you.”

But Johan Svanstrom, chief executive of Rightmove, has urged the Treasury to consider if these changes would be worth it financially and socially.

He said: “There is no real incentive for someone in a large home to downsize to a smaller one unless they truly need to and can still afford the stamp duty bill. The current rumours to stamp duty changes would only seem to exacerbate this, as it may deter some at the top of the market from moving if they would then face a new annual tax.”

Svanstrom highlighted that Rightmove’s data shows a proposed mansion tax would only affect a small proportion of the market.

He added: “The government needs to be cautious over the cumulative effect of taxation on higher priced areas of the country as it simply risks stalling this part of the market, since the importance of mobility for people and the overall economy is strong in those areas too.

“A slower market can affect all types of movers, from first-time buyers to key workers and families, even if a tax is aimed at higher value properties.”