As summer begins to draw to a close and the Autumn Budget nears, the Treasury has floated one of the most significant changes to property taxation in decades: taxing capital gains on the sale of primary residences.
The political backdrop that may force the Treasury to turn to these new taxes is no secret: the Chancellor needs to find some cash – now. The fiscal constraints upon Rachel Reeves are becoming more severe by the day, not helped by backbench rebellions earlier this summer that prevented her from making savings on the welfare bill, and her party’s manifesto prevents her from raising certain key taxes: income tax, employee’s National Insurance and VAT. It’s no wonder she’s looking to get inventive.
What Might This Tax Look Like?
If the Treasury presses ahead, the design of a capital gains tax on primary residences will matter as much as the principle. The leading option is a £1.5 million threshold, above which any gain would be taxed at the same rates that already apply to other assets: 18 per cent for basic-rate taxpayers and 24 per cent for higher-rate taxpayers. This would leave most households untouched, but would catch high-value sales concentrated in London and the South East.
An alternative under discussion is a levy on homes above £500,000 – designed to replace Stamp Duty Land Tax for main residences. Liability would shift from buyer to seller, with rates set progressively according to property value. The aim would be to make property taxation more proportional and less volatile than stamp duty, which fluctuates sharply with the market cycle.
International examples show a range of directions open to Rachel Reeves to balance fairness, market mobility, and revenue. In the United States, homeowners can exclude up to $250,000 of gain ($500,000 for couples) if they have lived in the home for two of the past five years. This was designed to encourage mobility while still taxing very large gains. Most middle-class sellers therefore avoid any tax, while wealthier households in expensive markets contribute more. The system raises meaningful revenue without unduly discouraging sales.
In France, capital gains tax applies to secondary home sales but with taper relief that reduces the taxable amount the longer a property is owned, with full exemption after 22 years. This design raises significant revenue while discouraging short-term speculation in property.
Nordic countries illustrate yet another model. Sweden taxes housing gains at around 22 per cent, but allows sellers to defer payment if they reinvest in another home, smoothing the impact on movers – and alleviating any harmful effects on market mobility. Finland however exempts gains entirely if the property has been the seller’s main residence for at least two years.
Stakeholder Perspectives
Reaction to the floated reform has been, charitably, mixed. There has been harsh criticism from many corners of the housing industry: Rightmove has warned that a £1.5 million threshold would fall disproportionately on London and the South East, creating regional inequities in the housing market and going some way to freezing the housing market in the region where labour and housing mobility is most key to Britain’s wider prosperity. Colliers has similarly argued that taxing gains on main homes risks “stalling the market” at a time when activity is already weak, while Hamptons estate agents have pointed out the risk of a “cliff edge,” where sellers deliberately price homes just under the threshold to avoid liability.
By contrast, some think tanks and economists have spoken out in support of the mooted changes. The centre-right think tank Onward has argued that shifting taxation onto property wealth and away from labour would constitute a rebalancing of a tax system that disproportionately extracts cash from the PAYE system. The OECD has long recommended capping exemptions on main residences, describing the UK’s current system as unusually generous and regressive, since it disproportionately benefits households who have seen the largest gains. Others, however, such as commentators at taxpolicy.org, have cautioned that behavioural responses could mean the Treasury raises less than it expects.
Final Thought
What is clear is that the Government is in a fiscal straitjacket. Misbehaving backbenchers, the Office of Budget Responsibility, and the bond markets together are constraining the Chancellor into a microscopic box, containing very few good choices – hence why she is looking to think outside of that box. Housing wealth, long protected by the principle of full exemption on main homes, is an obvious target.
But taking this particular path would carry risks as well as rewards. On one side of the ledger, the sums are tempting: billions could be raised by trimming this relief. On the other, the behavioural effects are unpredictable: homeowners may simply sit tight, starving the market of supply and leaving the Treasury with less revenue than forecast.
Ultimately, the Chancellor may have little choice. Choosing to tax main homes would mark a sharp departure from the post-war consensus that rising house prices should remain untaxed. If Reeves goes ahead, she would be betting that voters will accept a hit to housing wealth in return for protecting income and consumption taxes. If she does not, she will need to find the money elsewhere, and in today’s fiscal climate, it’s difficult to see where that might be.
