Labour has been willing to make enemies during its first year in power. Pensioners, employers, farmers, non-doms and parents with children in private school have all been squeezed by the taxman.
Now, the Government seems to be turning its sights on a fresh source of revenue: middle-class homeowners. For the Treasury, the spoils are potentially enormous.
But with that reward comes huge political peril.
“The cliché about an Englishman’s home being his castle is a cliché for a reason,” says political analyst, James Frayne. “It’s based on a deep-rooted English obsession with homeownership, and a belief that the state shouldn’t step into their front gardens, let alone over their welcome mat.
“This should make any politician wary about going after people’s homes. The Government’s inevitable claims that they’re going after the wealthiest will pass English voters by. This is about principle.”
Recent experience offers grim warnings. The Tories came a cropper on property-related taxes in government less than a decade ago, when their election manifesto put older people’s homes at risk to pay for social care – a measure so unpopular it arguably cost them a majority at the subsequent election.
“The bottom line is this,” says Frayne. “Only politicians who have lost their grip on reality think it’s a great idea to go after English voters’ homes.”
Nonetheless, Chancellor Rachel Reeves is said to be drawing up plans for a fresh tax raid on property, as she struggles to boost the economy and plug a £50bn black hole in the public finances.
A series of briefings this week point to a possible “mansion tax” or an annual levy to replace stamp duty, but there are many levers the Chancellor could pull in the upcoming Budget.
Already, Britain’s property tax system is a complex web riddled with inefficiencies and ripe for reform. Many existing levies either penalise the poorest homeowners or act as a drag-weight on the economy.
But potential tax changes are fraught with risk – and could well backfire on Britain’s fragile housing market. One of the biggest dangers is that the tax burden will fall not on a wealthy elite, but a squeezed middle already paying the country’s bills.
So what could be in store for British homeowners this autumn?
Annual property tax
In the last 30 years, stamp duty has morphed from a small charge that few people paid into a substantial cost incurred by millions of home movers.
The tax, levied on home buyers, starts at 2pc on the slice of a property’s value between £125,001 to £250,000, rising to a top rate of 12pc on the portion over £1.5m (and 17pc if you already own a home). First-time buyers get a discount, but the cost of stamp duty can often exceed an annual salary.
Economists have long argued that stamp duty discourages people from moving up and down the property ladder, undermining dynamism in the economy. It punishes families at all stages of life, from first-time buyers to older downsizers.
The Institute for Fiscal Studies (IFS) has called on the Chancellor to scrap stamp duty, calling it Britain’s “worst and most damaging tax”.
“Getting rid of stamp duty would oil the wheels of the housing market,” says Tom Bill, of estate agency Knight Frank.
The question is what should replace it.
One of the more radical proposals Treasury officials are expected to put in front of the Chancellor is an annual property tax.
Sources have said that any changes Reeves makes would be designed to “protect revenue” currently generated by stamp duty, meaning homeowners with properties considered expensive – including many middle-class families – would be at the sharp end.
Onward, a think tank, has proposed a yearly levy on the portion of a home’s value over £500,000, at a rate of 0.54pc of the property’s total value, with a 0.28pc supplement over £1m. At these rates, the owner of a £1.5m home would pay an annual charge of £9,500.
Setting the tax at this level would net the same amount of revenue as stamp duty. Rates would need to be set higher for Reeves to raise extra money.
Council tax and stamp duty raise a combined £58bn annually, making them the fifth-largest source of government revenue after income tax, National Insurance, VAT and corporation tax.
It would be very difficult for Labour to argue that a property tax that kicks in at £500,000 would target only the wealthy elite. The average property price in London is £561,309, according to the Land Registry.
Analysis of this data by Hamptons, an estate agent, shows that over 50pc of homes in the capital, and 26pc in the South East, sell for more than £500,000.
Yet a radical shake-up on this scale may be the Chancellor’s best chance of boosting revenue. Receipts from an annual levy would be more predictable than stamp duty, which taxes transactions, and therefore is subject to the whims of the market.
Simply tinkering with existing stamp duty rates to try to extract more cash from wealthier property owners would be a losing strategy, according to Bill.
“Skewing [the tax burden] towards the top end of the market is tricky because it’s more discretionary – homeowners usually have more choice about whether to move,” he says. “They may simply sit on their hands. And this will affect revenue.”
Capital gains raid
Modest earners in Britain are increasingly being taxed as if they are rich. Income tax thresholds have been frozen since 2021, dragging millions of workers into higher brackets, despite salaries not rising in real terms.
Just 3.5pc of British adults paid the 40p income tax rate in 1991, a figure set to climb to 14pc by 2027, according to IFS figures.
2208 Nearly 15pc of workers to pay higher rate of tax
Anyone earning £100,000, once considered a bumper salary, loses 62p of the next pound they earn to income tax and National Insurance – more than a worker on seven figures – due to the tapering of the personal allowance. They also lose eligibility to childcare subsidies worth thousands of pounds.
Almost 725,000 workers will fall into this tax trap this year, up from 300,000 in 2018.
Ian Cook, of wealth management firm Quilter, sees the potential changes to property taxes as a “direct attack” on these same middle-class families.
“These are the people who bear the highest proportion of taxation,” he says. “They’ve lost child allowance, lost the personal allowance and have spent years paying off their mortgages.”
A so-called “mansion tax” would be a fresh blow to this beleaguered group. The Chancellor is understood to be considering ending private residence relief – which exempts people from capital gains tax when they sell their primary home – for properties above a certain value, yet to be decided.
If the levy matched existing capital gains tax rates, higher-rate taxpayers would pay 24pc of the value of any gain they make, while basic-rate taxpayers would have to pay 18pc.
Introducing this tax would shatter the long-cherished notion that primary residences are sanctuaries from the taxman, and fundamentally reshape the country’s property tax system.
The extent of the damage would depend on how Labour defines a “mansion”. The Times suggested that the Government is considering applying capital gains tax to primary residences sold for over £1.5m.
Critics believe the tax would cause a logjam on the housing ladder, backfire on the Exchequer and speed up the exodus of the super-rich from Britain.
The plan also raises the prospect of homeowners paying tax on inflationary gains and, in many cases, losing money in real terms.
Crucially for the Chancellor, it may fail to raise revenue. Hitting home movers with capital gains tax would suffer from the same problem as stamp duty – it is a tax on transactions, which affects behaviour, and therefore receipts.
Aneisha Beveridge, of Hamptons, says a levy on sales over £1.5m would act as “a strong disincentive to sell, dampening transactions and potentially weighing on house price growth and Treasury revenues alike”.
Paul Johnson, the former director of the IFS, said this week that the proposal made no sense, and could even lose the Treasury money.
“It would gum up the housing market at the top end hopelessly… I can’t believe they’re considering it,” he added.
Even if a “mansion tax” were set at a high level, people on middle incomes would worry that this was just the thin end of the wedge, warned Laith Khalaf, of investment manager AJ Bell. “The next time the Government needs a bit of money, they could just lower the threshold,” he explained.
Council tax overhaul
Most commentators agree that council tax is a mess. Properties are taxed depending on the band they fall into – A to H – which is based on their value.
But these valuations haven’t been updated since 1991, meaning the amount paid often bears little resemblance to a home’s market price.
The tax is regressive – poorer homeowners pay more council tax than wealthier ones relative to the value of their property. The outdated system means they often pay more in absolute terms, too, because councils set their own tariffs.
In Westminster, one of Britain’s richest boroughs, the annual council tax bill for a typical home this year is £1,017. By contrast, in Hartlepool, a heavily deprived part of the country, homeowners in the equivalent tax band are charged £2,495.
Around 30pc of homes are in the “wrong” band, according to Hamptons. Reeves herself, writing in 2018, said a re-evaluation of bands was “long overdue”, and that the case to replace council tax with “a property tax, levied on property owners” should be considered.
Last month, a cross-party housing committee of MPs called for councils to be given the power to revalue properties in their area, define property bands and apply or remove discounts.
An overhaul of the system would create new winners and losers.
Updating the values to 2025 prices would almost certainly result in higher bills for households in wealthier areas where property prices have risen the most – namely London and the South East.
Bill, of Knight Frank, says: “I could see [the Government] adding a couple of extra bands to capture values at the top end. This would skew the tax burden towards wealthier homeowners.”
Official data suggests that increasing council tax rates on bands F, G and H properties would hit more than a million homes across England and Wales.
Scrapping council tax altogether is another option. Hamptons has calculated that around one in six homeowners nationally (17pc) would pay more if council tax were replaced by a flat 0.48pc annual tax, similar to Onward’s proposed rate.
In London, that figure jumps to 75pc – and nearly 100pc for those in bands F to H. Lower income homeowners in high-value areas, who currently have the option to avoid stamp duty by staying put, would be hit hardest, Beveridge says.
She adds: “While annual revaluations might sound fairer, they’re notoriously difficult to get right – especially without a transaction to anchor the value.”
Land tax
The idea of taxing land rather than the properties that sit on it has gained traction across the political spectrum in recent years.
Advocates range from ex-Labour MP, John McDonnell, to the economist, Tim Leunig, a former adviser to Rishi Sunak.
They argue that a land tax could simultaneously unlock growth, redistribute wealth more fairly and provide additional revenue for the Treasury. Land taxes don’t penalise investment or home improvements, unlike property taxes.
Charles Goodhart, a former Bank of England economist, has said that Reeves has “the best chance since Lloyd George” of introducing a land tax. The former Liberal prime minister attempted to bring in a land tax in 1909 while serving as chancellor. The move triggered a constitutional crisis and two general elections, and ultimately failed.
However, Andrew Dixon, of property tax campaign group, Fairer Share, says that assessing land values separately from property is “technically complex”, and would take years.
“A land value tax has attractions in theory, but in practice, it’s very difficult to implement fairly and quickly,” he adds.
Using land tax as a revenue raiser would destabilise the market if it were introduced too quickly, according to Goodhart.
He has calculated that raising £22bn immediately through a land value tax – enough to plug the fiscal black hole the Chancellor faced before her inaugural Budget – would trigger a 7pc drop in property prices.
Inheritance tax relief
A tax raid on housing may not be confined to the living. A Labour source said the Government was looking for new ways to “tap into the inheritances” of people whose assets had risen in value.
Adam Smith, a former chief adviser Jeremy Hunt, sees this is a “heavy hint” that changes to inheritance tax exemptions are being considered.
Currently, estate owners can pass on £325,000 of assets free of 40pc death duties, plus an additional £175,000 when passing on a primary residence to a direct descendant – the co-called “residence nil-rate band”.
Added together, this means a couple can pass on £1m tax-free when leaving their home.
Scrapping this relief is one of a menu of options that has been presented to successive chancellors by the Treasury.
Analysis suggests the move would drag 30,000 additional families into the inheritance tax net each year, and raise the Exchequer a respectable £2bn annually.
It would also mean many grieving families having to find an extra £70,000 if they inherit a home worth more than £500,000.
This would be “catastrophic for even modest homeowners”, according to Smith. “It would hit tens of thousands of families who will have inherited a long-standing family home from their parents, and would then have an unexpected inheritance tax bill.
“In some circumstances, it would force people to sell their family homes. It would cause uproar across the country.”
Frayne, who runs frequent focus groups and polling to assess the mood of the nation, is damning about the whole swathe of property tax proposals.
“Extending inheritance tax to catch more homes which are currently exempt, or imposing capital gains tax on families who sell their main home would both go down extremely badly with voters.”
He says the Government’s apparent current thinking “would create a lethal cocktail” by mixing taxes on homeownership with two of English voters’ particular hatreds: taxing grieving families and retrospective rule changes.
“The English despise politicians who make up new rules because they didn’t like the old ones,” he says. “They despise unfairness.
“It is hard to imagine more stupid proposals for an English electorate already seething with Labour on other issues. Rachel Reeves and her wider Treasury team seem to have lost the plot.
“Locked out of raising income tax, National Insurance and VAT, the Treasury appears to be considering a range of fiscal options that would devastate them electorally.”
