Reeves eyes new property taxes to plug the fiscal hole

The government needs to plug a £30bn–£50bn fiscal black hole in the upcoming autumn budget, and officials are eyeing property market tax reforms as a potential solution.

That's about as much as we know after a flurry of newspaper stories in the past 24 hours suggested that officials are considering ditching stamp duty in favour of either; applying capital gains tax on primary residences above a certain threshold; imposing an entirely new tax on the sale of homes valued above a certain threshold; or implementing a new annual local property tax in the medium term that would replace council tax. Or potentially all of them, or maybe none of them.

Governments often trail policy changes ahead of budgets to gauge public sentiment, but these ideas feel particularly half baked. The Guardian set hares running by reporting that officials were considering a new national property tax on the sale over homes worth more than £500,000. The paper also reported the intention to replace council tax with a new annual levy - proposals seemingly influenced by this UK Onward think tank policy paper. Officials then denied the £500,000 sales tax threshold to the Times, suggesting it would need "to be far higher". The Times then raised the prospect of applying capital gains tax on primary residences valued at more than £1.5 million, though the threshold "is the subject of live discussion in the Treasury."

Getting rid of stamp duty would of course be popular – economists are largely in agreement that it's a regressive tax that harms mobility and growth. But levying any sales tax would discourage mobility, so why switch one for another? And as Tom Bill tells the Times, it's not clear how much money the Treasury will raise by applying capital gains tax on higher value primary residences when values in prime central London are down 20% in the past decade. They may opt to levy CGT from the point of last sale, which would raise some money, but it could only be done fairly by accounting for inflation, which would cut the take substantially. 

Breaking pledges

Reforming property taxation in the UK is no easy task. If stamp duty is flawed (and it is), any attempt to replace it would require the Treasury to find a way to recover the lost revenue. At that point, some form of annual levy starts to look like the only viable option, and one that would at least eliminate many of the current behavioural distortions.

Adding new council tax bands has long been on the cards. As the Times points out, the current system is pegged to values from 1991, but establishing new values would be a long, complex process. Aspects of the UK Onward policy paper that was the source of the original Guardian report also have a neatness to them, such as allowing local authorities to raise taxes on property value up to £500,000, which would provide local councils with a more uniform and stable tax base, while national government handles the more volatile revenue stream from property value above this level.

If the last few days have been confusing on this topic, expect much more of the same in the coming weeks.

A busy July

The UK's annual rate of inflation accelerated to 3.8% in July, from 3.6% in June, according to official figures published this morning. While that's in-line with Bank of England forecasts, it's a little hotter than the 3.7% economists had been expecting. 
We've now had a string of data points that will make it very difficult for lenders to cut mortgage rates until the narrative shifts. First we had the Bank of England's August decision on interest rates, which was a 5-4 split. Then we had a hot set of wage figures, followed by a surprisingly resilient set of GDP figures and now an inflation overshoot. 

Fifty of 62 economists polled by Reuters during August 13-19 said the BoE will cut the base rate by 25 basis points once more this year, most likely at the November meeting, but traders have been ramping up bets that officials will hold rates steady through the rest of 2025, Bloomberg reported on Monday.

Still, estate agents have had their busiest July in five years as the rising supply of homes for sale has weighed on asking prices, Rightmove reported this morning. 

In other news...

Europe’s rich are watching Norway’s election debate on wealth taxes (FT).