Chancellor Rachel Reeves is contemplating the introduction of capital gains tax on house sales exceeding £1.5 million as a measure to address a £40 billion shortfall in public finances. This potential change, anticipated to be part of this year’s Autumn Budget, would see higher-rate taxpayers paying 24% on the value of any gain from the increase in their property’s value, while basic rate taxpayers would incur an 18% charge.
Currently, the sale of a primary residence in the UK is exempt from capital gains tax under the private residence relief policy. According to The Times, which initially reported the proposal, officials estimate that a £1.5 million threshold could impact approximately 120,000 homeowners, resulting in capital gains tax liabilities of £199,973 for higher-rate taxpayers.
However, experts have expressed concerns that the £1.5 million threshold might create a cliff-edge effect, potentially leading to increased prices for more expensive homes as sellers adjust for the tax. Additionally, there could be a clustering of activity just below the threshold as sellers aim to avoid the tax entirely. This policy might also discourage downsizing, a significant issue in the UK, where over 40% of homeowners aged 65 and over reside in homes larger than necessary, according to a report by Zoopla.
There have also been discussions about a proportional property tax on homes valued above £500,000, although government sources have dismissed the validity of this threshold. If implemented, a property tax would aim to replace stamp duty and council tax, both of which are considered in need of reform. This would assist Reeves in generating necessary funds, as she has committed to not raising taxes on working individuals. The Chancellor faces additional pressure to introduce more wealth-based taxes, notably from Deputy Prime Minister Angela Rayner.
The National Institute of Economic and Social Research (NIESR) has indicated that taxes may need to increase by over £50 billion to manage costs and provide credible fiscal headroom, reassuring bond traders about Labour’s financial strategies. Capital Economics and other leading analysts suggest that tax increases in the range of £15 billion to £25 billion may be necessary.
