Property taxes seem to be the latest area being considered for reform as the Treasury looks at ways to balance the books in the lead up to this year’s Autumn Budget.
Chancellor Rachel Reeves is considering replacing stamp duty with a new levy on the sale of homes worth more than £500,000, according to a report in The Guardian.
The rumoured reforms could benefit some buyers as under current rules, home movers begin paying stamp duty when they purchase a property worth £125,000. First-time buyers have a larger tax-free allowance worth £300,000.
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While stamp duty is currently payable on around 60% of transactions, the new levy would only affect around 22% of property sales, according to Onward, the think tank that has reportedly inspired the Treasury’s thinking.
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However, the rumoured reforms are likely to be an effort to boost tax revenues – and the exact impact for those selling homes worth £500,000 or more will depend on the rate that is charged and how it is levied.
While the exact details of what the government is considering are unclear, a report from Onward proposes an annual rate of 0.54% for properties worth between £500,000 and £1 million, and 0.81% on values above that.
While the rate proposed by the think tank is annual, the amount would only be payable after a sale. MoneyWeek has contacted Onward for details of how this would be calculated in practice.
When asked to comment, the Treasury did not confirm or deny the rumours but said: “As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy – which is our focus.
“Changes to tax and spending policies are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8 billion and cut borrowing by £3.4 billion.
“We are committed to keeping taxes for working people as low as possible, which is why at the last Autumn Budget, we protected working people’s payslips and kept our promise not to raise the basic, higher or additional rates of income tax, employee National Insurance, or VAT.”
Despite this, it looks increasingly likely that Reeves will need to find ways to boost tax revenues in the 2025 Autumn Budget, as high borrowing costs, weak economic growth and failed spending cuts put pressure on the public purse.
The National Institute of Economic and Social Research (NIESR), an independent think tank, recently said the government is on track to miss its fiscal rules by £41 billion and called for a “moderate but sustained increase in taxes”.
One of the big criticisms of stamp duty relates to issues of regional unfairness. The latest rumoured reforms could run into the same problem, with those in London likely to be disproportionately impacted by the tax.
The average house price in the capital is now £566,000, according to the latest data from HM Land Registry. This means a typical household could find itself paying the tax on a fairly normal property, having stretched itself to get on the housing ladder in the first place.
Tax reforms also risk disrupting the market. “Sellers may underprice homes to avoid the tax, or inflate asking prices to offset the cost – in turn distorting valuations and stalling transactions,” said Alice Haine, personal finance analyst at investment platform Bestinvest.
Furthermore, current stamp duty rules already act as a deterrent to downsizing. A tax on sales is unlikely to help when it comes to these bottlenecks. Haine thinks exemptions for downsizers and greater support for first-time buyers would be more effective.
“A tax break for those moving to smaller properties could unlock housing stock, encouraging older homeowners living in under-occupied family homes… to sell up, freeing up more large homes for families,” she said. “Similarly, more support for first-timers at the start of the housing chain would help to keep the market moving.”
Experts advise against acting on speculation
While rumoured policies can create anxiety for taxpayers in the lead up to a fiscal event, it is important to remember that they may not actually come into effect.
Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown, called the changes “pure speculation”, adding that it is “essential not to be tempted into knee-jerk reactions that could leave you worse off”.
Explaining the potential effects of panicked decisions, she added: “Anyone planning to sell a valuable property might be worried that their tax bill could rise if they sell after the Budget, so it could persuade them to rush to the market. Meanwhile, anyone planning to buy might be worried about the rumours of an annual tax, so might hold back.
“The imbalance of supply and demand could mean the market dries up and property values fall. Those who plough on with a sale at a lower price could end up taking a significant price cut to escape a tax that never happens.”
Council tax could be replaced with a local property tax
As well as looking at stamp duty, sources told The Guardian that the Treasury is considering replacing council tax with a new local property tax in an attempt to boost struggling local authorities.
Bills could be based on the value of the property, amid concerns existing council tax bands are out of date. Bands have not changed since 1991, despite the fact that house prices have risen considerably since then, with values rising more rapidly in some areas than others.
The think tank Onward recommends a minimum annual bill of £800, with those with more valuable properties paying a higher rate. It also recommends charging owners rather than residents.
Any council tax reforms could be slow to take effect. While reports suggest stamp duty reforms could be implemented this parliament, council tax changes could require Labour to win a second term in office, according to The Guardian.
