Mansion tax becomes a reality

The announcement by Rachel Reeves of the “High Value Council Tax Surcharge” means that the long feared Mansion Tax has become a certainty. This annual charge will be introduced in 2028 and levied on top of council tax for properties worth £2 million or more. The measure is forecast to raise £0.4 billion in 2029 – 2030.

The value will not be based on the last point of purchase but rather on new valuations to be produced by the Valuation Office to reflect their values in 2026.

Those values will then place properties worth £2 million or more into one of four bands. Properties worth £2 million to £2.5 million will pay £2,500 per year. Those worth over £5 million will pay a maximum of £7,500. The income will go to Central Government and not to the local authority in which the property is based.

Whilst many will be of the belief that owners of high value homes can afford it, the tax will affect thousands of property owners who bought homes in now affluent parts of London such as Notting Hill many years ago during which time the value of their homes have soared. It may force some to sell and down value although the Government has said that it will consult on options for support or deferral.

One certainty is that it will produce pricing cliffs near the thresholds discouraging transactions – and renovations which would push up values. Another is that valuations will be contested and appealed.

In her speech the Chancellor also announced an increase in property related income tax from 2027.

At present tax is paid on rental income at normal marginal rates. The 2% rise means that the basic, higher and additional rates of income tax paid by private landlords on rental income would each increase to 22%, 42% and 47%.

The surcharge is expected to raise around £0.5bn a year on average from 2028-2029.

Over recent years the amount of expenditure that landlords have been able to offset against rental income in order to reduce their taxable rental income has dwindled. The OBR has commented on this gradual erosion of landlord returns over the past ten years predicting that it is likely to reduce rental supply over time which risks a steady long-term rise in rents if demand outstrips supply.

However the reforms introduced by the Renters Rights Act in October will impact this forecast. Many of those reforms are designed to suppress rises in rents. The conversion of assured shorthold tenancies into periodic tenancies takes effect from 1^st May 2026 thereby removing the current practice of no-fault evictions whereby landlords can terminate an existing tenancy in order to grant another at a higher rent. New rules on rent increases will restrict rises in rents for existing let properties. Therefore the potential for a long term rise in rents will be dependent on how frequently rental properties become vacant as that becomes the opportunity for a landlord to increase the rent. That might stagnate the rental market with tenants reluctant to leave their homes for what are likely to be more expensive ones.

Large numbers of private landlords are already selling up. But whether the release of this housing stock into the sales market results in housing becoming more affordable is yet to be seen.

There had been strong rumours about both an increase in Stamp Duty Land Tax (SDLT) as well as its abolition altogether. The Chancellor has left SDLT rates unchanged. This is in many ways unsurprising given the major changes made in the Autumn 2024 Budget. That Budget increased the additional rate of SDLT from 3% to 5% on purchases resulting in a buyer owning more than one property. It also reduced the threshold at which the standard rates of SDLT became payable from £250,000 to £125,000 which took effect from 1^st April this year.