Introduction to the Mansion Tax and Its Impact
In a recent announcement, Chancellor Rachel Reeves introduced an annual mansion tax targeting homes valued at over £2 million. This new levy is expected to affect approximately 200,000 properties, mostly located in London and the South East. Despite the relatively small number of affected homes, the tax is anticipated to have a significant impact on the broader property market.
Homeowners are already adjusting their strategies, with some sellers pricing their homes to avoid the tax. Additionally, older occupants of eligible houses may be forced to downsize due to the increased financial burden. Estate agents have reported a surge in demand for homes priced around £1.25 million, as buyers seek to avoid the new tax.
The market had been expecting a more substantial tax on properties valued at £500,000 or more, so the Budget provided some relief. Claire Reynolds from Strutt & Parker noted an immediate sign of recovery, with many inquiries coming in from potential buyers ready to proceed with their transactions.
Henry Griffin from Winkworth highlighted increased activity in the housing market, particularly around the £1.25 million mark. He expressed optimism about the spring market outlook. Mortgage rates are also expected to decrease, especially if the Bank of England decides to cut interest rates.
However, while the Budget was less damaging than anticipated, there were still negative consequences for tenants, landlords, and first-time buyers. Let’s explore these issues in detail.
The Mansion Tax: A Terrace Tax?
The mansion tax will be imposed annually starting in 2028 as a surcharge on council tax. The amounts due will vary depending on the home’s value, ranging from £2,500 for a £2 million property to £7,500 for a property worth over £5 million. However, it remains unclear how properties will be revalued or how appeals will be handled.
There is concern that the scope of the tax could be expanded, potentially lowering the threshold to £1.5 million. Although the current threshold is high, it may still catch some modest family homes in London. Tom Bill from Knight Frank warned that the term “mansion tax” might become a misnomer, leading some to refer to it as the “terrace tax.”
Time to Downsize?
Many homeowners who purchased property decades ago may find themselves in a situation where they are “asset-rich but cash-poor.” The threat of the mansion tax may prompt some to consider downsizing. However, this decision should not be made hastily.
Oliver Loughead from RBC Brewin Dolphin advised that individuals considering selling should calculate the expected annual cost of the tax versus the financial and lifestyle impact of moving. In some cases, the mansion tax may be less than the costs associated with stamp duty, selling fees, and the disruption of moving.
For those who wish to remain in their homes but cannot afford the tax, Ingrid McCleave from DMH Stallard suggested that upcoming consultations may provide proposals for deferring the tax.
First-Time Buyers Get No Help
Rachel Reeves did not introduce a new version of the Help to Buy scheme, which previously benefited over 380,000 first-time buyers. Instead, aspiring homeowners face even greater challenges in saving for deposits. A new tax squeeze on landlords is expected to increase rents, further complicating the situation.
Over the past decade, rents have risen by 51%, averaging £1,385 per month, which consumes 44% of the average wage. Younger earners will also face difficulties due to the freezing of income tax thresholds. An earner earning £50,000 would now make £63,500, but due to the frozen threshold, they will pay an additional £2,700 in taxes annually.
The continued freeze on income tax thresholds will worsen the situation for several years. Additionally, a stamp duty hike was triggered last April when Labour refused to renew a Tory tax break.
What Next for Buy-to-Let?
Private landlords have faced multiple tax increases, and another rise is expected in April 2027. Income tax rates on rental income will increase by two percentage points, resulting in a basic rate of 22%, a higher rate of 42%, and an additional rate of 47%.
This change may encourage some private landlords to exit the market due to declining returns and stricter regulations. The Renters Rights Act, which imposes additional obligations on landlords, has taken effect this month. New buy-to-let investors are placing their properties into companies to reduce their tax burden.
However, if you own your buy-to-lets directly, it is essential to review how the new tax regime will affect you. While the Chancellor did not eliminate Rent A Room relief, which allows landlords to earn up to £7,500 tax-free, it should have been adjusted for inflation. This relief could potentially help offset mansion tax bills.