Key Takeaways
- The government may scrap stamp duty and introduce a capital gains-style tax on primary homes over £500,000, leaving many owners facing large bills.
- Experts warn the tax could create a price ceiling and slow overall housing market activity.
- Homeowners and investors face uncertainty ahead of the November Budget and are advised to avoid rash decisions.
The government is reportedly considering a significant change to the tax rules that could see owners of expensive homes hit with a large tax bill when they sell their primary residences.
Currently, the sale of a primary residence is exempt from capital gains tax, but Chancellor Rachel Reeves, under pressure to fill a black hole of up to £50 billion in the public finances, is considering scrapping stamp duty altogether, and introducing a replacement tax, equivalent to CGT, on owner-occupiers selling their homes worth more than £500,000.
Chancellor Risks Making Property Moves ‘Unaffordable’
Dan Neidle, a tax lawyer and founding director of Tax Policy Associates, says the idea of making homeowners pay CGT on the sale of their primary residence would make property moves even more unaffordable.
“Imagine someone bought an average detached house in 2010 for £250,000: that’s now worth £440,000. Say they want to move to another house of about the same value—perhaps to take up a job elsewhere, perhaps to join their family. Today there’s stamp duty of £12,000—and that’s already a problem. But if CGT applied, there would be a gain of £190,000 and capital gains tax of about £45,000. For most people that would be unaffordable.”
Higher rate taxpayers would pay 24% on the value of any gain they make, while basic rate taxpayers would have to pay 18% at the current rates.
Unlike stamp duty, which is already charged on property purchases and is payable by the buyer, not the seller, CGT has never before been payable on an individual’s primary residence.
Why a Change in Property Tax?
There is no doubt that the Chancellor is under financial pressure and needs to convince the UK’s jittery bond markets that the government is practicing fiscal prudence. She also needs to convince voters the government will stick to its pledge of not raising the main three rates of tax: National Insurance, income tax, and VAT. At the same time, she needs to foster economic growth.
Since the Labour government came into office last July it has claimed to have inherited a £22 billion fiscal “black hole” from the previous Conservative government. Now, just over a year later, the apparent figure has nearly doubled—to £41 billion—driven higher by the rising cost of interest payments.
However, experts warn short-term policy decisions could slow the UK’s vital housing market, and may actually bring in less revenue for the government.
A Potential Ceiling on Asking Prices
For one, the new tax could put an artificial ceiling on asking prices.
“If implemented, this tax risks creating an artificial ceiling on many properties around the £500,000 threshold,” says Daniel Austin, chief executive at boutique lender ASK Partners.
“While this may seem like a positive development amid the current housing crisis, most first-time buyers do not enter the market at this level, and because housing operates in an upward chain, the impact would reverberate across all price points,” according to Austin. “In London, where the average home now costs nearly £700,000, the measure would hit families hardest, incentivizing sellers to increase prices further in order to absorb the tax burden.”
What Should Homeowners and Investors Do?
Homeowners will have to wait until the Autumn Budget speech in early November to find out precisely what the government intends to do.
“The Labour government attack on assets should be a big concern for all financial planners as they try to prevent the tax tail from wagging the investment dog,” says Darren Lloyd Thomas, director Thomas & Thomas Finance and a fellow of the Personal Finance Society.
“Misinformation and fear will likely erode investors’ assets as they make knee-jerk reactions. A calm and constant communication line is needed for all of our clients to prevent this,” Thomas adds.
Homeowners and investors worried about the possible property tax changes may benefit from speaking to a regulated financial advisor to clarify their current tax liabilities and discuss how any potential change could affect them, ahead of the autumn announcement.
