In the Budget, Chancellor Rachel Reeves announced an annual mansion tax to be charged on homes valued at more than £2million.
Yet, while only 200,000 homes will be affected – most of which are to be found in London and the South East – the tax is forecast to reshape the whole property market.
Sellers will price their homes to dodge the tax while older occupants of eligible houses may be forced to downsize, unable to foot thousands more every year.
The levy is already having an impact – estate agents are reporting a surge in demand for unaffected homes priced around £1.25million.
The market had been braced for a tax grab on properties of £500,000 or more, though, which meant the Budget dispelled some of the prevailing gloom.
Claire Reynolds, of estate agents Strutt & Parker, commented: ‘We’ve seen instant signs of a “recovery”. A number of enquiries are landing in my inbox from people ready to give the green light on their sale or purchase.’
The new council tax surcharge for higher value homes has been dubbed a mansion tax but experts fear it could catch plenty of London terrace homes in its net
Meanwhile, Surrey-based Henry Griffin, of estate agents Winkworth, reported that househunters were immediately once more on the prowl.
He said: ‘We’ve seen more activity, mainly around the £1.25million mark. The outlook for spring is positive.’
Mortgages should also be cheaper by then – particularly if the Bank of England brings Christmas cheer by ordering a rate cut.
But although the Budget may have been less destructive of property than many expected, there was still bad news for tenants, landlords and first-time buyers, as we explain.
1. A mansion tax… or a terrace tax?
The mansion tax will be payable every year from 2028 as a surcharge on council tax. The amounts due will range from £2,500 on a home valued at £2million to £2.5million, up to £7,500 on a home of £5million-plus.
It has not been specified as to how properties will be revalued – or how the countless appeals will be managed.
But it is clear the scope of the grab could be widened. The starting point could be lowered to £1.5million, for example.
Meanwhile, although the £2million and above threshold is high, this will catch some relatively modest London family homes in the net.
Tom Bill, head of residential research at estate agency Knight Frank, warned: ‘The term mansion tax could increasingly feel like a misnomer.’
Hence why some are already calling it the ‘terrace tax’.
2. Time to downsize?
Many homeowners who bought property for a modest sum several decades ago are ‘asset-rich but cash-poor’, as Jonathan Stinton of Coventry Building Society points out.
The threat of the grab will make many among this group consider downsizing sooner rather than later – but this should not be a snap decision.
Oliver Loughead, of wealth managers RBC Brewin Dolphin, commented: ‘If you’re thinking of selling, start by calculating the expected annual cost of the tariff versus the financial and lifestyle impact of moving.
‘In some cases, the mansion tax may be smaller than the stamp duty, selling fees and disruption involved in downsizing.’
If you wish to remain in your home, but suspect you may be unable to meet the bill, Ingrid McCleave of law firm DMH Stallard says forthcoming consultation should produce proposals on the deferral of the tax.
First-time buyers got no help in the Budget, despite their dire situation
3. First-time buyers get no help
Rachel Reeves did not smile on Generation Rent. Despite rumours, she failed to introduce a version of the former Help to Buy scheme, which benefited more than 380,000 first-time buyers before its withdrawal in 2023.
Instead, those aspiring to a home of their own will find it even more difficult to save up for deposits – a new tax squeeze on landlords is set to trigger an increase on rents.
It’s a further blow to an already dire situation. Over the past ten years, rents have gone up by 51 per cent (averaging £1,385), swallowing up some 44 per cent of the average wage.
To add insult to injury, younger earners will also be left less well-off by the freezing of the income tax thresholds in the Budget.
The thresholds have been paused since April 2021. An earner on £50,000 then whose wages have risen in line with inflation would now be paid £63,500, but as a result of the higher rate tax threshold sticking at £50,270 they will pay an extra £2,700-a-year in tax this year. That’s money that could have gone towards saving a home deposit.
The continuing freeze on income tax thresholds will only make things worse for until beyond the end of the decade.
Meanwhile, a stamp duty hike was already triggered last April by Labour’s refusal to renew a Tory tax break.
4. What next for buy-to-let?
Private landlords have been penalised by a series of tariff hikes, but April 2027 will see another rise – when the rates of income tax on rental income are increased by two per cent.
The basic rate will be 22 per cent, the higher rate 42 per cent and the additional rate 47 per cent.
This change may encourage more private landlords to quit the business considering declining returns and tougher legislation.
The Renters Rights Act, which places extra obligations on landlords, took effect this month. New buy-to-let investors are placing their properties into companies, lessening the levy burden.
But if you own your buy-to-lets directly, start checking how the sums will work for you under the Reeves regime.
The Chancellor did do something for one class of landlord, though. You can still take in a lodger and earn up to £7,500 tax-free, as Rent A Room relief has not been affected (although it should have been uprated in line with inflation).
Would this be the way to offset those mansion tax bills?