How will the budget changes affect home owners and house prices? Here’s what has been announced.
Since the announcement of the new government’s first budget on 30th October 2024 there has been widespread concern and speculation over the state of the UK’s finances. For months we have heard how people would be worse off before they things got better.
Before the general election, Labour said it was committed to changing the taxation of non-domiciles, charging VAT and business rates on private schools, increasing stamp duty on residential property purchases by non-UK residents and increasing corporation tax. At the same time, promises were made not to increase taxes for “working people” (including rates of income tax, National Insurance and VAT). Capital Gains Tax (CGT), Inheritance Tax (IHT) and investment taxes were not mentioned.
The “£22 billion black hole” speech on 27th August by Keir Starmer suggesting that the biggest burden would be borne by those with the broadest shoulders, and brought about much speculation that it was quite likely few of us would be untouched by Labour’s solution. So, how will the budget changes affect home owners and house prices? Here’s what has been announced.
Stamp Duty Land Tax (SDLT)
Stamp duty is paid by buyers of property in England and Northern Ireland. The amount charged for stamp duty depends on the purchase price of the property, whether it is a main residence, when the purchase is made and whether the buyer is a first time buyer.
The SDLT threshold was increased in 2022, from £125,000 to £250,000, and for first time buyers from £300,000 to £425,000. The maximum property value to claim full relief for first time buyers went from £500,000 to £625,000 and potentially saved up to £11,250. In addition to this, landlords have paid a further 3% stamp duty since 2016.
Keir Starmer confirmed in June that the reduced level of stamp duty would return to previous levels after 31st March 2025. The duty is devolved in Scotland and Wales so is unaffected by the budget.
Once the thresholds are reset, every buyer of property selling for over £250,000 will pay an additional £2,500 stamp duty and the average homebuyer will pay £5,268 (from £2,768). As a result, property experts predict that fewer people will buy property and more of those who do will require a loan to cover the cost of paying SDLT. Around 14% of people already take out a loan to pay for stamp duty.
Any change in SDLT for first time buyers is expected to cause a “ripple” effect upwards, causing property chains to break and reducing the number of people able to move.
Higher Rates on Additional Dwellings (HRAD) which is paid on the purchase of a second home, buy-to-let residential property, or by companies purchasing residential property, will increase from 3% to 5% with immediate effect, and has already led to buyers pulling out of deals. The Chancellor said in her speech that the increase would result in 130,000 additional transactions over the next five years by first-time buyers and other people buying a primary residence, who would have a “comparative advantage” over those buying a second property.
The single rate of SDLT which is charged on the purchase of homes costing more than £500,000 by corporate bodies will be increased from 15% to 17%.
Capital Gains Tax (CGT)
When property is sold by owners of second homes and landlords, capital gains tax becomes payable. A higher and additional rate taxpayer currently pays 24% CGT on residential property. Basic rate tax payers pay 18% CGT.
CGT on most assets has been increased, however, the residential property thresholds are unchanged.
Inheritance Tax (IHT)
The main inheritance tax nil rate band of £325,000 and the residence allowance of £175,000 for homes passed on to direct descendants have not changed, so married couples can still pass on up to £1 million of inheritance free of IHT.
However from 2027, unused private pension pots will be added to IHT calculations, so more people will lose some of the residence nil rate band which is gradually removed on estates worth over £2 million up to £2.3 million when it stops. Anything left in a private pension will be subject to 40% IHT. The IHT threshold itself will be frozen until 2030.
Pension pots are a useful vehicle for inheritance tax planning, and wealthy families are often advised to keep hold of their pension pots if they can. Not all pensions can be transferred; in the case of annuities, for instance, the pension is usually not transferable when the pension holder and their spouse dies.
It is thought more families may now gift more money during their life, perhaps to help children buy a home, or use pension funds as income or to create a trust fund.
Agricultural Property Relief
From April 2026, the agricultural and business property reliefs designed to protect family farms and businesses are to change. There will be a 100% tax free band for the first £1 million but 50% will apply thereafter.
Council Tax reforms
Council Tax valuations are based on the price that a property (not used for business purposes) would have sold for on the open market on 1st April 1991 in England and 1st April 2003 in Wales. Factors taken into account include the size, location or character of the property. A property might be assessed to ensure it is in the correct band if it has been subject to a change of use, reduced in size or is newly built, or when requested, perhaps for a council tax appeal of band review.
If council tax were to be set by the government and adjusted across the country in line with current property values, average council tax bills would fall where property values have risen the least, such as the North and Midlands, while bills would rise in areas where property values have increased the most – in particular, London and the South East.
The revenue generated from council tax goes towards local authorities. LAs currently set the levels of banding in their areas and around 25% of their revenue is from council tax.
It is likely, therefore, that any government-led changes to council tax would on balance have little effect on the government’s coffers, even if the amount paid by individual households was increased or decreased.
Effect on Housing Market
The additional costs of holiday let tax relief and landlord relief previously imposed on landlords and home movers, and the additional costs of housing developers, have already made it more difficult for people to afford to build, buy or sell property. Add to this an increase in CGT and stamp duty, and it is unlikely the government’s target of 1.5 million new homes will be met.
Ahead of this, a rush of properties listed on the market has been predicted, as property owners attempt a quick exit from the market before the new thresholds come into effect. This might sound like good news for buyers, who might expect to bag a bargain, but it could have a negative effect on the housing market by reducing the value of all homes.
Rather than plugging the “black hole”, new homes simply won’t be built until the market can afford them and, for those who have just bought, the tipping point into negative equity won’t be far away.