Government proposals to reform property taxation could reduce activity in a market that’s already lacking confidence.
The Autumn Budget may be some months away, but speculation is already rife in the wake of recent proposals regarding key property taxes. Stamp Duty, Capital Gains Tax and Council Tax are all under the microscope, having long been flagged for major reform.
However, Auction House has reviewed the advantages and disadvantages of the new proposals and fears that the announcements have already increased uncertainty in the marketplace and raised the prospect of market stagnation.
Stamp Duty Tax
Current proposals have suggested that Stamp Duty on primary residences could be abolished and replaced with a national Property Tax. This would be an annual tax calculated as a percentage of the property value when purchased. The thresholds for this are currently obscure, but it is generally understood that the tax will apply on a sliding scale of between 0.5-0.8% to properties with values of over £500,000.
The proposal is being considered as a way of removing the Stamp Duty hurdle, encouraging market activity and charging owners a proportionate tax based on the value of the property.
“It is argued that Stamp Duty stifles market activity as a tax on trading,” commented Oliver Prior, National Commercial Director of Auction House. “This makes the property market less fluid than it might otherwise be. A new property tax on primary properties could potentially remove barriers to entry and encourage stakeholders to engage with the market more readily.”
Council Tax restructure
The Stamp Duty proposals are being considered alongside much-debated Council Tax reform. Council Tax is set at a local level as a means of distributing the local funding requirement across an authority, but with some local authorities accumulating huge deficits, pressure is growing to modernise the system.
“We are stuck in a pricing structure whereby multimillion pound townhouses in the Royal Borough of Kensington & Chelsea might be paying the same monthly council tax bill to that of a flat in a less affluent part of the Borough,” explained Oliver. “Council Tax is determined by bands linked to property values back in 1991. The market has clearly moved on significantly since then, and the system of property tax should be updated to reflect this.”
He adds: “Total upheaval of the system would likely be a step too far, but the government may look to adopt additional higher bands for higher value properties as a means of increasing tax revenue. This would be easier to implement and wouldn’t require structural change.”
Capital Gains Tax
Facing a budget shortfall, the Chancellor also appears to be considering removing the Capital Gains Tax relief on primary residences that are worth more than £1.5 million.
Oliver sees this as a proposal to be wary of: “Applying Capital Gains Tax to private residences will likely stall the market; down-sizers could decide to stay put, which will reduce activity in the market and put downward pressure on growth.
“Applying Capital Gains Tax would be a particularly large burden for those living in higher value areas. It could also affect the older generation significantly, as they are more likely to be living in homes that have appreciated in value over the course of 20 or more years. Capital Gains Tax will inevitably reduce levels of activity as people hold onto their property to avoid paying an ever-growing tax bill.
“To truly create more fluidity, property owners need to be incentivised to upsize and downsize freely, without a high tax burden being imposed on them.”
National Insurance for rental income
If these sweeping proposals weren’t already controversial enough, news has recently leaked that landlords could also be facing further tax burdens, something that could have a major impact on the already stretched private rental sector.
“We have seen it suggested that the Chancellor is considering charging landlords National Insurance on rental income in a bid to plug the £40 billion budget black hole,” commented Oliver. “This is an unprecedented consideration that further squeezes landlords and weakens the viability of property ownership as an investment. If this tax is implemented, investing in property, which supports our rental market and the growing demand from renters, will be even less attractive to would-be investors.”
Uncertain times ahead
“At the moment, these proposals are just that: draft proposals that the government is floating to see what, if any, land with the public. However, the discussion that this has opened is likely to make both buyers and sellers nervous in the run-up to the Autumn Budget. Sales may slow down over the next few months as the market waits for clarity,” said Oliver Prior.
“We could also see more buyers and sellers turn to auction, as we did in the lead-up to last year’s Autumn Budget. Auction has the advantage of enabling sales to move quickly and with security, giving buyers and sellers confidence that the sale will go through once the hammer goes down,” he concluded.
Find out more about Auction House
If you’d like to learn more about selling your property or land at auction, you can book a free, no-obligation valuation on the Auction House website. Buyers can also visit the site to view all the properties currently available.
