Rachel Reeves plans to tax high-value homes to plug fiscal black hole

Times

2 days ago

Rachel Reeves is drawing up plans to hit the owners of high-value properties with capital gains tax when they sell their homes as she attempts to fill a £40 billion hole in the public finances.
The chancellor is considering using the autumn budget to end the current exemption from capital gains tax that people enjoy when they sell their 'primary' residence under plans that will be seen as a 'mansion tax'.
Higher-rate taxpayers would have to pay 24 per cent of the value of any 'gain' they make from the increase in the value of their property while basic rate taxpayers would have to pay 18 per cent.
Under the plans the current exemption from capital gains tax, known as private residence relief, would come to an end for properties above a certain threshold.
While the threshold is the subject of live discussion in the Treasury, officials believe it could raise significant sums of money. A threshold of £1.5 million would hit around 120,000 homeowners who are higher-rate taxpayers with capital gains tax bills of £199,973.
However, property experts warned that the owners of more expensive properties could choose to simply stay put instead of selling up and this could stymie the housing market and limit revenues for the government. There are also concerns that it could hit pensioners who want to downsize particularly hard.
Aneisha Beveridge, head of research at the estate agent Hamptons, said: 'It's a big change that would hit long-term owners hardest and create a cliff-edge at £1.5 million, distorting behaviour around that point.
'While the headline gains look substantial, they're often the result of decades of ownership and, in some cases, house prices haven't even kept pace with inflation.
'For households who don't need to move, this could act as a strong disincentive to sell, dampening transactions and potentially weighing on house price growth and Treasury revenues alike.'
The Treasury is also looking at the idea of imposing an entirely new tax on the sale of more expensive homes, as first reported by The Guardian. However, government sources rejected suggestions that the threshold for a potential annual levy would be £500,000, suggesting it would have to be far higher to avoid slowing the market.
No decisions have been taken given the budget is months out. Reeves is said to be concerned that Britain's property taxes are outdated and in need of reform and she also has limited room for manoeuvre given Labour's manifesto commitments.
The chancellor will put the principle of 'fairness' at the heart of her budget. She is looking at property taxes after ruling out increasing income tax, national insurance or VAT in Labour's manifesto. The manifesto also included an explicit pledge by the government not to raise taxes on working people.
There are concerns that the current council tax system is deeply unfair because it is based on property values from 1991. Critics say that this has led to a 'regressive' system under which a house valued at £1 million pays only twice as much council tax as a house worth £80,000.
The Treasury has considered adding additional bands in the past but any changes are likely to be highly complex and would carry significant political risk.
Removing the capital gains tax exemption for higher-value properties is viewed as a more realistic revenue-raiser.
• Most millionaires think they'd be better off outside the UK
Isaac Delestre, senior research economist at the Institute for Fiscal Studies, said: 'Short of reinventing council tax entirely, the current system could be made more proportional by increasing council tax multipliers for properties in the highest bands or even adding additional bands. Another option would be for central government to levy a new, separate tax on high-value properties, in addition to council tax.'
Tom Bill, from the estate agency Knight Frank, said that if only gains over the past few years were factored in, any tax could raise little money. He said: 'I'd be surprised if there are any gains to tax at the top end of the property market, given that prices in prime central London are down 20 per cent over the last decade. If there was anything that reduced demand further, then the prospect of gains in the short-term would pretty much vanish.'
Simon Brown, the chief executive of the property data company Landmark Information Group, said: 'Any tax that rises with property value risks slowing the housing market even further. If downsizing becomes less attractive, larger family homes stay off the market and transaction volumes fall. This reduces overall movement in the market upwards and downwards, and not only reduces choice for families and first-time buyers, but also hits the Treasury by shrinking the tax base.'
Kirstie Allsopp, the property expert and TV presenter, warned that discussions about potential mansion taxes risked 'destabalising the property market'.
By Stephen Swinford, Political Editor
The concept of a 'mansion tax' is far from new. Over the past 12 years both the Liberal Democrats under Nick Clegg and then Labour under Ed Miliband have toyed with the idea, only for it to fail to survive.
However, the dire fiscal circumstances facing Reeves now mean it is very much back on the table. The chancellor is said to be looking at two broad options: the first is a capital gains tax raid on the sale of high-value property; the second an annual levy.
Both will be contentious, as recent political history suggests. Vince Cable first proposed the idea on behalf of the Liberal Democrats in 2009. He suggested the new tax would hit anyone owning a home worth more than £1 million. He then proposed a £2 million threshold after the Liberal Democrats entered a coalition with the Tories.
The plans were dropped in favour of a 7 per cent stamp duty charge on houses worth more than £2 million after negotiations with George Osborne, then the chancellor. The Liberal Democrats tried to revive the idea but were met with outright opposition from their coalition partners.
In 2013 Ed Miliband, then the Labour leader, revived the proposals. In the run-up to the 2015 election he claimed that the policy would raise £1.2 billion a year which could be used to fund the NHS. Osborne once again used his budget in 2014 to announce increases in stamp duty, which he suggested were an alternative to a mansion tax.
Reeves, however, has little room for manoeuvre given Labour's pledge not to increase the main rates of income tax, VAT or national insurance. With a black hole in the public finances of as much as £41 billion the mansion tax could be about to make a return.