Chancellor Rachel Reeves is preparing for a pivotal Budget announcement in November, as the UK government confronts a widening fiscal gap between public spending and tax revenues. With borrowing levels projected to exceed previously set limits, economists warn that urgent measures are needed to bridge a multi-billion-pound shortfall. Among the options under consideration are significant reforms to stamp duty, capital gains tax (CGT), and council tax the main property-related levies in the UK though these proposals carry complex economic and social implications.
Government Borrowing Set to Break Rules
The Treasuryโs borrowing trajectory has raised alarms among economists and fiscal watchdogs. According to forecasts, unless new tax revenues are found or spending cuts implemented, the government will breach its own self-imposed borrowing caps. With Chancellor Reeves ruling out increases in income tax, employee National Insurance contributions, and VAT, attention has increasingly shifted towards the property tax system.
โFinding new and sustainable sources of revenue is essential if the government hopes to balance public service funding with fiscal responsibility,โ said Simon French, chief economist at Panmure Liberium. He noted that any significant overhaul of property taxes could be โpotentially incredibly lucrative but also incredibly controversial.โ
The government, however, has remained tight-lipped on detailed proposals. A Treasury spokesperson reiterated, โWe are committed to keeping taxes for working people as low as possible,โ declining to comment on recent media speculation.
Capital Gains Tax: Targeting High-Value Homes
Capital gains tax is levied on the profit made from selling assets such as stocks, second homes, and investment properties. Currently, gains on the sale of a primary residence are exempt, except in limited circumstances involving exceptionally large properties or parts rented out.
Reports in major outlets suggest the government is examining the possibility of removing this exemption for higher-value homes. This means that homeowners selling properties above a certain price threshold could face CGT on any increase in value since purchase, with current rates at 18% for basic-rate taxpayers and 24% for higher-rate taxpayers.
In the 2022-23 financial year, CGT raised approximately ยฃ13.3 billion, mainly from the sale of assets other than primary residences. Introducing CGT to pricier main homes could generate additional revenue, assuming it does not deter market activity.
However, critics warn of potential market side effects. โSlowing down transactions in the high-end housing market could counteract the expected fiscal gains,โ said French. Homeowners may defer sales or restructure ownership to mitigate tax liabilities, weakening the policyโs efficacy.
Abolishing Stamp Duty: A Double-Edged Sword
Stamp duty land tax (SDLT) is a tax on property purchases, with rates escalating based on the purchase price. Buyers of homes valued below ยฃ125,000 currently do not pay SDLT, and first-time buyers are exempt up to ยฃ300,000. Higher-value transactions can attract rates up to 12% for properties above ยฃ1.5 million.
Some reports suggest the government may abolish stamp duty to encourage market fluidity and reduce upfront costs for buyers. Colleen Babcock, property expert at Rightmove, calls stamp duty โa huge barrier to movement, from first-time buyers to downsizers,โ underscoring its role in dampening property transaction volumes.
Yet, the tax raises significant revenue: ยฃ11.6 billion in the last financial year alone. Eliminating stamp duty without an alternative source of taxation could create a major shortfall. Consequently, proposals include coupling abolition with the introduction of a national property tax to compensate for lost income.
Introducing a National Proportional Property Tax
Among potential substitutes for stamp duty is a national annual property tax targeting homes valued over ยฃ500,000. A report by Dr Tim Leunig, affiliated with the centre-right think tank Onward, has influenced Treasury deliberations by recommending a proportional levy payable each year rather than as a lump sum at purchase.
Leunigโs proposal suggests a base rate of 0.54% on home values between ยฃ500,000 and ยฃ1 million, with a higher rate on amounts exceeding ยฃ1 million. For example, a property purchased for ยฃ600,000 would incur an annual tax on the ยฃ100,000 exceeding the threshold. Properties below ยฃ500,000 would remain unaffected.
This model aims to distribute tax burdens more evenly over time and reduce barriers to property transactions. However, Lucian Cook, head of residential research at Savills, cautions that โa gradual annual levy would not replace the lost immediate revenue from stamp duty payments,โ suggesting that its fiscal impact would be delayed and potentially insufficient for short-term government needs.
Revisiting Council Tax: Calls for Overhaul and Fairness
Council tax, the local levy funding municipal services, is based on property values as of 1991, or estimated values for newer builds. This outdated valuation method has been widely criticised for fostering disparities: identical properties in different councils attract different tax bills, raising questions of fairness and administrative complexity.
Attempts to reform council tax have faced intense scrutiny, particularly regarding proposals that would redistribute funding from wealthier to less affluent areas. Critics argue that such changes risk both political backlash and reduced local service quality.
โThe challenges inherent in reforming council tax illustrate the broader difficulties the government encounters in adjusting property-related levies without alienating voters or diminishing revenues,โ said housing policy analyst Dr. Amelia Ward of the London School of Economics.
Broader Implications and Future Outlook
The governmentโs property tax deliberations come at a time of economic uncertainty, housing market volatility, and public service funding pressures. Property taxes account for a significant portion of UK tax revenues, and reform could reshape housing market behaviours, wealth distribution, and government financing for years to come.
Economists warn that any tax reforms must balance fiscal needs with market stability and fairness. โTax policy is not just a matter of revenue but also of social impact,โ said Ward. โStriking this balance is crucial to avoid unintended consequences like reduced housing mobility or exacerbated regional inequalities.โ
With the November Budget deadline approaching, all eyes remain on Chancellor Reeves to announce measures capable of addressing the fiscal gap without burdening working households or destabilising the property market.
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