In the latest furore over Labour’s plans for property taxes, Chancellor Rachel Reeves is reported to be considering charging some homeowners a levy if they sell their home and make a profit.
It follows reports in the last few days that the Government is mulling over sweeping changes to stamp duty and council tax, in a bid to fill the £51billion fiscal black hole.
At the moment, people don’t have to pay tax if they sell the home they live in and the price has increased since they bought it – known in tax parlance as a ‘capital gain’.
But according to The Times, Reeves is considering changing this rules so they would have to pay this, if they made more than a certain amount of money.
We explain what taxes people currently pay when selling property, how much they pay and what could potentially change.
Tax target? Those who sell higher-value homes and make a profit could be in line for new levy
What is capital gains tax?
Capital gains tax is levied on profits from assets including second homes, buy-to-let properties, stocks and shares and personal possessions.
It is not currently charged when people sell their main home, which they live in full-time, but this is what Reeves is reported to be considering changing.
It’s important to note that it is only charged on increase in value or ‘gain’ made on the property or shares, not on the whole value.
Everyone also gets an annual capital gains tax-free allowance of £3,000, so any gains below this aren’t taxed.
How much is capital gains tax?
It depends on which tax band the person is in. If you are a basic rate taxpayer, with an annual income of up to £50,271, you pay 18 per cent.
If you are a higher or additional-rate taxpayer, earning £50,271 or more, you pay 24 per cent.
Take, for example, a landlord who purchased a buy-to-let property for £200,000 and sold it a decade later for £230,000 – requiring them to pay capital gains tax under the current rules.
They would only pay tax on the £30,000 increase in value. If they were a basic-rate taxpayer, this would be charged at 18 per cent.
This would set their bill at £5,400. However, if they hadn’t made any other capital gains that tax year, they could use their £3,000 annual allowance to cut the bill to £2,400.
Selling costs such as an estate agent and solicitors can sometimes be deducted.
Big bill: Older homeowners who have lived in the same property for years and seen its value rise substantially could be hit hardest, if the plan comes to fruition
What is private residence relief?
Private residence relief is the name for the tax exemption which means those selling their main home don’t pay capital gains tax, no matter how much it increases in value.
This is what Rachel Reeves is said to be considering taking away, or making changes to.
What is being proposed?
According to The Times, people selling their home would now need to pay capital gains tax at the rates described above – but only if their home was above a certain price threshold.
It is not yet known how much a property would need to be worth, or how much the ‘gain’ would need to be, for the home seller to be drawn into the tax net.
The Times said a threshold of £1.5million would hit around 120,000 homeowners who are higher-rate taxpayers with capital gains tax bills of £199,973.
At current rates, a home bought for £800,000 and sold for £1millon by a higher-rate taxpayer would attract a capital gains tax bill of £47,280, before any deductions.
Who will it affect?
Older homeowners looking to downsize could be hit especially hard, as well as anyone who has lived in their property for a long time or experienced big house price gains.
Those who have stayed in the same home for decades and enjoyed large property price rises could find themselves hit with a bill worth tens or even hundreds of thousands. This could prevent them from downsizing at all.
The average house price in London in 1980 was £25,732, according to the Land Registry.
Today, that has jumped to about £561,000 – though many family-sized homes in areas of the capital that have experienced gentrification could be worth double that.
If capital gains tax was charged at current rates, a basic rate-taxpayer couple selling a £561,000 home could face a tax bill of £114,180, after deducting £5,000 for selling costs.
However, it may be that a home worth that much could fall under the threshold.
Stephen Perkins, managing director at Norwich-based Yellow Brick Mortgages, said: ‘I can see a lot of families in London being caught with this higher tax bill.
‘It may push more wealthy tax contributors to exodus the UK, which is already a problem following the Chancellor’s last budget.’
Why is it controversial?
Some are terming the increase a ‘mansion tax’ which punishes people who have worked hard to buy a nice home.
Harps Garcha, director at Slough-based financial adviser Brooklyns Financial, told the news agency Newspage: ‘The Government’s plan will have a massive impact on London and the South East, where many middle-class families have sacrificed themselves for years to build wealth through their homes.
‘These homeowners expected to rely on that equity in retirement by downsizing, yet they now face being taxed twice, first through stamp duty and then capital gains.
‘Rather than rewarding prudence, this policy punishes those who have worked hard and planned responsibly for their future.’
Property experts also say taxing homeowners could would gum up the property market, as people at the top end of the ladder would be less inclined to move.
This could increase the number of older people in homes that are too big, and young families could struggle to upsize.
Transaction trough: One property expert says such a tax could put people off moving
If people were less likely to move because of the policy, this might even limit the amount of money the Treasury might raise from the tax.
Tom Bill, head of UK residential research at estate agent Knight Frank, said: ‘Anyone with a taxable gain would think twice before selling, which would reduce transaction numbers.
‘The Government seems to want a predictable flow of revenue that is skewed towards the wealthiest homeowners.
‘That would be best achieved by re-banding council tax rather than introducing transaction taxes that change behaviour in the most discretionary part of the property market to the point they fail to raise what is intended.’
When could this change happen?
This change is reported to be an announcement being tabled for the Autumn Budget, in October or November.
It is unclear when the new rule, if it was announced, would come into effect.
One potential problem is that any announcement could create a rush of people trying to sell their homes before the new tax was put in place, to avoid paying it.
When Rachel Reeves announced an additional stamp duty levy on landlords last year, this came into effect immediately to stop people from doing this.
What has changed already?
In recent years, both Conservative and Labour governments have made the capital gains tax allowances less generous.
The annual capital gains tax-free allowance was £12,300 until April 2023, which meant it was typically only levied on wealthier taxpayers.
However, radical cuts to the CGT allowance – to £6,000 in spring 2023 and £3,000 from April 2024 – make it inevitable that many more people will now have to pay capital gains tax.
Rachel Reeves also increased capital gains tax for stocks and shares investors in last year’s Autumn Budget.
The rate charged increased from 10 per cent to 18 per cent for basic rate taxpayers and 20 per cent to 24 per cent for those paying higher rates of tax.
This brought them into line with the already higher levies on property.
The Treasury’s response
The Treasury declined to comment to the Daily Mail on ‘speculation’ about future changes to tax policy.
A spokesman said: ‘As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy – which is our focus.
‘Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8billion and cut borrowing by £3.4billion
‘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.’
