Labour Government Mansion Tax or Wealth Tax Plans

Labour's leadership recently reversed its earlier property and wealth taxation promises. Chancellor Rachel Reeves has now confirmed that the Labour government will not introduce new taxes on buy-to-let investors or wealthy property owners, contrary to previous suggestions by the party. In a recent interview with the Daily Telegraph, Reeves firmly ruled out the possibility of introducing a mansion tax or any form of wealth tax, including capital gains tax (CGT) increases.

This stance is a clear departure from her comments two years ago when she suggested that those who earn through wealth, such as income from stocks, shares, or buy-to-let properties, should contribute more in taxes. Reeves justified this shift by stating she has no spending plans for £12 billion. She emphasised that Labour focuses on growing the economy rather than increasing taxes, restating that the party has no plans to raise taxes beyond what has already been announced.

BTR and Labour's Rent Control Policies

The autumn 2024 announcement that they will abandon mansion tax also aligns with Labour's earlier reversal of rent control policies. During the summer, Housing Minister Lisa Nandy confirmed that Labour would no longer pursue rent controls, labelling them as a 'short-term fixing plaster' rather than a comprehensive solution to the housing crisis.

Labour Taxation Policy:  Capital Gains Tax

Labour's decision to avoid raising CGT has sparked speculation and concern within the property market. There is a growing worry among landlords and investors about potential tax changes in the upcoming October Budget. Experts warn that speculation over a possible CGT increase could trigger a wave of property sales. If Reeves were to align the capital gains tax or CGT rate with income tax, higher-rate taxpayers could see their tax bills surge by two-thirds when selling their properties.

How Property Taxation is Affecting Landlords

Aligning the capital gains tax or CGT rate with income tax is a pressing concern given recent Buy-to-Let (BTL) market trends. According to a leading chartered accountancy and business advice firm, purchases of BTL properties have plummeted by 14 per cent, from 224,700 in June 2023 to 193,700 in June 2024.

Causes of a Declining Buy-to-let or Private Rental Sector

The decline the Private Rental Sector is marked by the lowest level of BTL purchases since 2016 when the government introduced a higher stamp duty rate on additional dwellings, and was then made worse by phasing out mortgage income tax relief. Effective 1 April 2016 higher rates of Stamp Duty Land Tax (SDLT) became due on purchases of additional residential properties, such as second homes and buy-to-let properties. The stamp duty premium being 3 percentage points above the normal homeowner residential SDLT rates.

Known as Section 24 the requirement to pay income tax on all property earnings.

Section 24 was introduced by the Income Tax Act 2007 and was phased in over a number of years. It removed a landlord's right to deduct the majority of their finance costs, including mortgage interest and arrangement fees, from their rental income before calculating their tax liability. This means landlords have to pay tax on the gross income earned from rental properties.

Summary:  Landlord Property Taxation Explained

Tax changes including:

Section 24 Income Tax Act 2007 - mortgage interest relief phased out, andStamp Duty Land Tax in 2016 introduced a higher stamp duty rate on additional dwellings, have caused a fall in Buy-to-Let (BTL) investments in the private rental sector (PRS) which has seen a massive exodus of landlords fuelling rental growth and affordability problems. It has been a perfect storm made worse over last 12 months by rising interest rates on BTL mortgages. The result of adverse taxation, increased mortgage costs have made BTL properties less financially attractive. With restrictions on mortgage interest deductions, reduced allowances for wear and tear expenses, and the 2016 cuts to Private Residence Relief, which has increased the CGT liability for landlords selling properties that were once their primary homes.

Industry players are concerned that the fear of further tax increases under the new labour government will prompt yet more landlords to exit the market. They point out that while a continued decline in mortgage rates could potentially revitalise the BTL market, the current climate of uncertainty is likely to keep many would-be investors on the side-lines. Despite the speculations and market concerns, Reeves has been noncommittal about the tax policies she may pursue in the autumn Budget. During a visit to the United States, where she engaged with global investors to boost UK economic growth, she acknowledged the need to balance generating revenue for public services and promoting economic growth.

Although she ruled out raising VAT, income tax, or National Insurance, she did not clarify whether CGT might be targeted. The ambiguity surrounding Labour's tax strategy has increased scrutiny from business groups and economic analysts. Critics argue that any increase in CGT could disproportionately impact entrepreneurs and small business owners, potentially stunting economic growth when the UK strives to recover from economic challenges.

As the October 2024 Budget approaches, all eyes will be on Reeves and the Labour leadership to see whether their current stance on wealth and property taxes holds firm or whether new measures will be introduced to address the government's fiscal demands. With the UK's public finances under strain, the decisions made in the coming months will likely have a lasting impact on both the housing market and the broader economy.