As the Chancellor’s search for extra revenue to plug £40bn fiscal hole continues, a raid on property taxes looks to be on the horizon.
Rachel Reeves is considering taxing landlords’ ‘unearned income’ as part of her drive to fill her £40bn budget black hole.
In a move that could raise over £2bn, the Treasury is said to be analysing the possibility of applying National Insurance to landlords’ rental incomes.
As Labour struggles to reduce its £40bn budget shortfall without crossing its red lines on income tax or VAT, it is said to be ‘eyeing up’ the substantial amount of money locked up in property as a potential source of alternative revenue.
According to a report in the Times, the focus has now moved onto what Labour describes as landlords’ ‘unearned income’ – rents. In 2022-23, there was £27 billion of net property income, so if National Insurance was levied at the standard 8%, then it would generate around £2.18 billion, according to the latest figures.
It would mean a typical landlord earning between £50,000 and £70,000 from their properties would have to pay an additional £1,057 in tax per year.
With landlords already facing huge increases in their costs and legislative burdens, industry insiders warn it could result in many selling up. Labour supporters of the plan, however, argue that if they did, it would result in lower house prices, enabling renters to get onto the property ladder.
And, they add that tenants would be protected by the upcoming Renters’ Rights Bill from both eviction and excessive rent rises to compensate.
Adam Corlett, principal economist at the influential Resolution Foundation, said “with tax rises clearly coming this autumn, the chancellor should use this as an opportunity to make the tax system fairer and more efficient. One way to achieve this is to ensure different forms of income are taxed at the same rate, for example, by levying national insurance on income from rental properties. After all, there’s no good reason why landlords should face lower tax rates than their tenants.”
A Treasury spokesman declined to comment directly on the proposal but instead rolled out the Government’s now standard line: “As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy, which is our focus.
They then added “we are committed to keeping taxes for working people as low as possible, which is why at last autumn’s budget, we protected working people’s payslips and kept our promise not to raise the basic, higher or additional rates of income tax, employee national insurance, or VAT.”
Could Stamp Duty Be Scrapped?
The shock news that Chancellor Rachel Reeves is planning to scrap Stamp Duty and replace it with a property tax paid by sellers has gathered much support within the property industry, which has long said the current levy stops people moving home.
The Guardian reports ahead of the Autumn Budget, Chancellor Rachel Reeves has tasked officials to “study how a new ‘proportional’ property tax could be implemented and model its impact before reporting back to ministers.”
The tax would be paid by owner-occupiers on properties valued over £500,000, which The Telegraph says would disproportionately affect homeowners in London and the South East.
According to The Guardian, the amount paid would be determined by the property’s value, with the rate set by central government and collected directly via HMRC.
However, the tax would not replace stamp duty on second homes.
Analysis of Land Registry data by Hamptons, cited by The Telegraph, shows that half of English home sales over £500,000 currently occur in London, with another 26% in the South East.
The Guardian reports that the proposals would affect around a fifth of property sales, compared with roughly 60% under current stamp duty levels.
The Conservatives and property experts have hit out at the Chancellor’s plans, warning of unintended consequences for the property market.
Sir Mel Stride, the Tory Shadow Chancellor told the Telegraph “this tax grab would punish families for aspiring to own their own home. Under Labour nothing is safe. Your home, your job, your pension – the Chancellor has all of it in her sights.
“Rachel Reeves will tax your future to pay for her failure.”
Craig Fish, of London-based Lodestone Mortgages, told the Daily Mail “As usual Rachel Reeves is only thinking about how to earn a quick buck. The long-term consequences could be far worse. It’s likely that the major downside is it would stop people selling or moving, especially in high-value areas, namely the south. The result is less income overall.”
Colleen Babcock, Rightmove’s property expert, said “Stamp duty is a huge barrier to movement, from first-time buyers to downsizers. We recently called for an increase to the zero rate thresholds at which first-time buyers and home-movers start paying stamp duty, and backed a suggestion from one of our agent partners that stamp duty should be paid over a longer time period. If changes are brought in that make home-moving genuinely more affordable for people then we would welcome them, but without firm details it remains to be seen if a different type of taxation would leave property owners better or worse off in the long run.”
Timothy Douglas, head of policy and campaigns at Propertymark, said “discussions around reforming Stamp Duty are welcome because it is a significant barrier to moving and getting people on the housing ladder. What’s key is that any reforms are evidence-based and support first-time buyers, second steppers and those looking to right-size. Economic growth can come from reducing the financial burden of Stamp Duty, which we know increases the number of transactions, but any changes must work alongside differing property prices and the dynamic nature of our housing markets across the country.”
Speculation around Capital Gains Tax also
There’s speculation that capital gains taxes could be revamped to prevent wealthy individuals from hoarding wealth in the form of assets.
As it stands, capital gains taxes on inherited properties are reduced or eliminated via private residence relief.
In the Autumn Budget, which generally takes place around October or early November, Chancellor Rachel Reeves will set the economic agenda for the next few months.
Responding to the speculation, Sarah Coles, head of personal finance, Hargreaves Lansdown, said “as a tax on wealth, this could be in the frame at a time when the government is keen not to focus on taxes on earned income. There have been suggestions of a potential shake-up to capital gains tax, including how it’s treated after someone dies.
Recent governments have hiked the tax and cut the annual tax-free allowance, but while data for 2023 shows that it dragged 87,000 more people into paying CGT, the tax take itself actually fell by a third. There’s a strong chance wealthier investors are hoarding assets until they die, because capital gains reset on death. It raises the question of whether the government will tweak this rule, so it remains payable by the estate. It could be horrible news for those who invest outside a stocks and shares ISA, whose estate could end up paying both CGT and IHT on their investments.”
In the months leading up to last year’s Budget a number of people sold assets owing to fears the tax would be hiked, which never happened.
Coles added “for landlords who decided to sell up, they reacted to a tax hike that never came, and the exodus of landlords from the rental market has caused huge headaches for tenants.”
In terms of inheritance tax, the government is thought to be exploring the possibility of a cap on gifts that people can make during their lifetime.
Currently no tax is paid on gifts providing the person gifting the money lives for seven years.
Coles said "there’s a risk that, after the changes, people hold back on making these gifts, leaving their families struggling. There’s also the danger that people will rush to make gifts under the current regime, and give away more than they can afford, before they can afford to do so. This could leave them horribly short of cash, especially if they need care later in life. If you’re not sure what to do, it’s vital not to rush into anything you could come to regret.”