What the Budget could mean for Residential Property
The much anticipated first Labour budget is predicted to introduce significant tax changes. As the residential property market, stalled by high interest rates, planning complications and the cost-of-living crisis, begins to recover, what impact could the rumoured proposals have on the market?
Capital Gains Tax
Capital Gains Tax (“CGT”) is the tax on the profit made from selling or disposing of an asset, such as the sale of a residential property where the value has increased since purchase. Overall, residential property has increased in value since the 2008 crash. However, the Private Residence Relief typically excludes property used as the owner’s main home (subject to certain exceptions). Any changes to CGT rates would primarily affect buy-to-let investments, holiday lettings and second homes.
The Department for Levelling Up, Housing & Communities published a survey in 2023 which identified 809,000 second homes owned by households in England, the majority of these let out as rental properties.[i]
CGT rates are linked to the owner’s income tax banding and subject to personal allowances. The current rates are 18% for standard-rate and 24% for higher-rate taxpayers. The latter was reduced from 28% to 24% earlier this year under the previous government.
Rumours are that the main change will affect the higher-rate, ranging from a roll-back to the 28% to a jump of 39%. Estimates are that this could raise £1bn[ii] to plug the treasury’s ‘fiscal hole’ left by the previous government and fund the ambitious growth plans of the new government. To many the increase is a foregone conclusion, and the question is only whether the changes will be implemented immediately or brought in next Spring. However, there are an equal number of news stories circulating that property CGT will be excluded from a general hike in rates affecting other assets, such as company shares.
If the changes do include property, what could this mean for the residential property market? The tax changes together with increased regulation, particularly relating to energy efficiency, and diminished landlord rights proposed by the Renters’ Rights bill (and the licensing regime for holiday lettings introduced by the Levelling and Regeneration Act 2023, yet to come into force) may encourage landlords to sell up. The predicted ‘Landlord Exodus’ was spoken of since 2023 when the then government introduced the Renter’s Reform Bill (the Bill failed to make it through the wash-up when the General Election was called last July.)
Although many landlords are not inclined to dispose of their rental properties, especially when rents have increased significantly (The average UK private rent increased by 8.4% in the 12 months to September 2024, with rent inflation in London at 9.8%). However, if any landlord was planning to sell in the next five years, they may speed up their plans if the tax changes are not immediately implemented. This could result in a spring surge in transaction volumes.
The ‘Landlord Exodus’ cannot happen in a vacuum. The residential property market is a carefully balanced ecosystem, upset one part and the ripple effects are felt throughout. The historic stock problem, which kept property prices high, is already beginning to shift. Could a flood of previously let properties result in falling prices? This could be good news for those trying to get onto the property ladder, perhaps not so good for those looking to downsize, release equity or those on the brink of good mortgage offers requiring lower loan-to-value.
However, the greatest impact could be felt by renters. Rent demand is currently high, for some rents are already unaffordable, and a reduced pool of available properties may see rents continuing to climb. This consequence, unintended or unacknowledged, may imply the new government shares the mindset of the old; that home ownership is paramount at the expense of renters, and there is a blindness to the fact that some are unable or unwilling to become homeowners.
Stamp Duty – Non-Residents Surcharge
Stamp Duty Land Tax (“SDLT”), with its labyrinth of reliefs and surcharges is a self-assessment tax charged on property purchases and transfers in England and Northern Ireland (with similar but not identical taxes operating in Scotland and Wales). The tax plagues property lawyers, but its complete annihilation seems out of the question as it current contributes £13bn[iii] to the treasury coffers.
The non-resident surcharge was introduced in 2021 and adds a 2% charge on top of the standard rates, subject to certain exceptions. The Labour pre-election manifesto suggested that the Chancellor would increase this to 3% as part of a collection of non-dom tax reforms and might even be brought in from Budget Day itself. Would such an increase deter overseas investors and derail the Government’s growth plans which formed a cornerstone in their economic manifesto.? On the other hand, could the changes be ineffectual as a ‘resident’ for the purposes of SDLT is someone who spends 183 days in the previous 12 months in the UK. Could overseas investors sidestep the increase by spending more time in the country? However, taken with the other non-dom tax reforms, overseas nationals may leave the UK, taking their investment and Labour’s growth plans with them.
Stamp Duty – First Time Buyers
Another change to SDLT could affect the First Time Buyer’s Relief.
The relief, introduced in 2017 was changed in Lizz Truss’ infamous ‘mini budget’, allowing first time buyer relief to avoid SDLT purchases up to £425,000 and a 5% flat rate on the remainder up to £625,000 with reduced rates. Properties with a purchase price over £625,000 are completely excluded from the relief and would pay SDLT on the standard rates. These changes were temporary and are due to revert to the previous rates (no SDLT on properties up to £300,000 and 5% on the remainder up to £500,000 and no relief for properties over £500,000) from April 2025. The Chancellor may look to bring this deadline forwards. Those first-time buyers currently transacting may be watching the budget carefully to assess the impact on their transactions or, again we may see a surge if the deadline is moved, for example, to the end of the calendar year.
One criticism of the current relief is its ‘all or nothing’ approach. Properties over £600,000 (or £500,000 in April 2025) get none of the relief. As property prices spiralled following the pandemic, especially in the capital (the overall average property in London is £691,146[iv]), many first-time buyers found the property price excluded them from the relief. However, there has been no indication that the fundamental application of the relief is likely to change. Furthermore, the Institute for Fiscal Studies highlighted that ‘SDLT has a claim to be the most economically damaging tax in the UK. It makes both housing and labour markets less efficient, acting as a drag on growth. It should be reduced or – even better – abolished, and certainly not increased.[v]’ If Reeves is to adhere to such advice, she may steer clear of any SDLT changes whatsoever.
Conclusion
There is a high degree of speculation about the Budget. Undoubtedly, the Opposition will be quick to call out any tax reforms which contradict the manifesto which won Labour’s landslide. The Liz Truss mini-budget fiasco is still fresh in the memory of homeowners still reeling from the consequential interest rate and inflation hike. The Chancellor has an unenviable job of delivering a budget which must balance a not-quite-recovered post-pandemic economy with manifesto promises. Anyone transacting, owning or otherwise involved in residential property will be watching her carefully.
[i] English Housing Survey 2021 to 2022: second homes - fact sheet - GOV.UK
[ii] Rachel Reeves considers raising capital gains tax to 39% | Autumn budget 2024 | The Guardian
[iii] Options for increasing taxes | Institute for Fiscal Studies
[iv] House Prices in London (accessed 23rd October 2024)
[v] Options for increasing taxes | Institute for Fiscal Studies
