"The proposed Capital Gains Tax on primary residences above £1.5 million is particularly concerning. Historically, the family home has enjoyed protected status in UK tax policy. Changing this principle could mean people are more reluctant to move"
- Clare Andrwes - Moore Barlow
As speculation continues to swirl about Chancellor Rachel Reeves' Autumn Budget, the property sector finds itself in limbo. The proposed tax reforms under consideration include National Insurance on rental income and the replacement of stamp duty entirely – both of which could fundamentally alter the residential property market, impacting how we buy, sell and rent homes in the UK.
The weight of National Insurance
One of the more likely reforms is the proposed 8% National Insurance levy on rental income, potentially raising £2 billion annually for the Treasury, as reported in the Guardian. Currently, landlords pay income tax on rental profits but benefit from various allowable deductions, including mortgage interest relief, maintenance costs, and replacement of furniture and white goods. Removing these while imposing additional National Insurance could create a double burden that will, to a certain extent at least, be passed to tenants.
This hike may result in smaller landlords exiting the market, heightening the already tense rental shortage and pushing rents even higher. For property lawyers, this means reviewing thousands of tenancy agreements and advising clients on new compliance requirements. The administrative burden alone may drive many smaller landlords to sell, further reducing rental stock while demand continues to rise.
Official government statistics show the private rental market houses 4.7 million households, with 93% of rental properties owned by individual landlords rather than institutional investors. This consolidation isn't necessarily negative, as professional landlords typically maintain properties better and understand their legal obligations.
However, the transition period will create significant displacement as properties are sold rather than re-let, potentially leaving thousands of tenants at loose ends.
The end of stamp duty
While applying National Insurance would be significant, replacing Stamp Duty Land Tax with a national property tax is arguably the most radical reform under consideration.
The current system, which, according to Zoopla, sees 83% of transactions attract stamp duty, could be replaced by a tax affecting approximately 20% of sales (those above £500,000). This threshold could create legal challenges with properties just above the line, seeing sellers attempt to reduce values artificially.
Currently, stamp duty is calculated when contracts are exchanged. Under the new system, it would be based on the final sale price, which will depend on how long the seller has owned the property for and by how much it has appreciated. This creates uncertainty that could slow sales and make them more expensive.
A tax on success?
Any threshold-based system will disproportionately impact London and the Southeast, where property values have risen dramatically above national averages. In the past five years, around 5.9% of property sales in London and 1.6% in the Southeast were at £1.5 million or above, according to data from Savills.
The proportion falls dramatically in other regions, dropping to only 0.06% in the Northeast and 0.05% in Wales, risking the creation of a two-tier property market.
The proposed Capital Gains Tax on primary residences above £1.5 million is particularly concerning. Historically, the family home has enjoyed protected status in UK tax policy. Changing this principle could mean people are more reluctant to move.
Market distortion
Property markets are very sensitive to tax policy changes, and even speculation can cause distortions. High-end sellers are delaying transactions, while potential buyers take a wait-and-see approach. This often creates a gap between what sellers hope to achieve and what buyers are willing to pay.
The downsizing dilemma also highlights the broader challenge. Data from Shakespeare Martineau found that over 40% of homeowners aged 65-plus live in properties larger than necessary, yet introducing selling taxes would further discourage downsizing, restricting supply for younger families while they pay additional taxes.
These reforms create serious legal concerns. Property owners who bought homes under today's tax rules could suddenly face new charges on sales they're already planning. Meanwhile, implementing a national property tax based on sale proceeds would require a new valuation system and appeals processes, which would be a massive administrative undertaking that could take years to establish properly.
A path forward
Property tax reform is long overdue, but implementation is the key here. Any changes must include transitional arrangements, dynamic thresholds that adjust with property values and clear compliance guidance. The legal profession is ready to adapt, but we need certainty and clarity on any changes introduced.
The Chancellor faces a delicate balancing act of raising revenue without damaging market confidence and modernising an outdated system without creating new inequities. Early signals suggest awareness of these challenges, but the proof will be in the budget's fine print.
As property lawyers, we'll be working overtime to interpret new legislation, advise clients on compliance strategies and navigate the disputes from any major tax reform. The property market has been tested repeatedly in recent years; these reforms will provide another significant one.
