With Labour’s autumn Budget less than a month away, the Treasury is reportedly considering ways to shake up property tax in the UK, including a controversial new levy on high-value properties.
Chancellor Rachel Reeves may need to find at least £22bn at the upcoming fiscal event, researchers from the Institute for Fiscal Studies (IFS) recently warned, as weak growth forecasts continue to reduce room for manoeuvre.
Adding further to the government’s woes are reports that the Office for Budget Responsibility (OBR) is set to downgrade the UK’s performance on productivity, which could add another £20bn gap in public spending.
Ministers have insisted that any tax rises should be focused on those with the most wealth, as living standards in the UK continue to drop. It is understood that the chancellor is currently considering a so-called ‘mansion tax’ that would see owners of high-value properties hit with a new charge.
Different versions of how the tax could work have been floated, both with the potential to raise considerable sums for the exchequer.
Most recently, it was reported that the chancellor is considering a simple levy on owners of properties worth at least £2 million, with an annual charge of one per cent of the amount over that threshold. This would mean a £10,000 yearly fee for homeowners with a property worth £3 million, for instance.
Earlier in the year, it was reported that a less radical and lower-revenue mansion tax could be introduced through changes to how capital gains are taxed.
In the UK, capital gains tax is payable on the sale of most high-value assets. This includes property, stocks and possessions worth over £6,000.
However, a homeowner currently does not usually need to pay capital gains tax on the sale of a property which has been their primary residence during the time they have owned it.
This would change under the proposed plans when the value of the property of the house being sold is worth £1.5 million or more.
The way capital gains tax works for property sales sees sellers required to work out the “gain” they have made on the asset. This is usually the difference between what they paid for the property and the amount they sold it for.
If this is above, or takes the seller above, their capital gains tax allowance – £3,000 every year – they will need to report and pay the tax.
For higher or additional rate income tax payers, the rate is 24 per cent. For those on the basic rate, it’s 18 per cent.
Several economists have warned the chancellor against either model of the tax, arguing that it would add another layer of complexity to an already opaque property tax system.
Many have instead called on the chancellor to consider a complete overhaul of the system, beginning with council tax which still charges home owners based on valuations carried out in 1991.
Former IFS director Paul Johnson recently toldThe Independent that the government should reform taxes so that council tax is proportional to the current value of a property, whilst also scrapping stamp duty.
He added that a mansion tax on properties worth more than £2 million makes “some sense”, but he warned that it “wouldn’t raise anywhere near enough to fill a significant hole”.
“Such houses are definitely undertaxed at present,” he said. “I’d be much happier with a proper comprehensive reform of property taxes which made council tax proportional to current value and got rid of stamp duty.”
