Labour’s mansion tax plans threaten to stall London property market

Speculation over Chancellor Rachel Reeves' potential introduction of a "mansion tax" ahead of her November 26 Budget has sent shockwaves through London’s property market, sparking widespread uncertainty among homeowners, buyers, and industry experts. Reports suggest the tax could impose a 1% annual levy on homes valued above £2 million, translating to an approximate £10,000 yearly charge on a £3 million property. Alongside this, there is the possibility of increasing income tax by 2p—a move that would break Labour’s manifesto pledge—and raising capital gains tax (CGT) to 24% for higher-rate taxpayers on gains from properties worth £1.5 million or more. These proposals come as Reeves faces the formidable challenge of closing an estimated £30 billion shortfall in public finances.

Estate agents have noted an immediate chilling effect. Sales agreed in September fell 3%, marking the first annual decline in two years, with prime locations in London and the South East feeling the brunt. Brokers report a market freeze as many sellers slash asking prices to expedite sales, while others opt to withdraw properties amid fears the tax could significantly erode their home equity. Becky Fatemi of Sotheby’s International Realty reflected the mood succinctly, telling The Telegraph that wealthy clients feel "disgust" and see little incentive to remain in the UK. She noted some clients prefer to wait out the current government, confident these policies will eventually be reversed. Such reactions point to a broader sentiment among high-net-worth individuals that the proposals risk driving wealth—and investment—overseas.

The potential ramifications extend beyond the ultra-rich. Middle-class families in London and the South East who have accumulated wealth through property ownership now face a heavy tax burden that threatens their retirement plans, according to Harps Garcha of Brooklyns Financial. He warned that these homeowners, who had planned to downsize and rely on their property’s value for retirement, may now be taxed twice—initially through Stamp Duty and then again by increased CGT—punishing prudence and long-term planning. Research from Audley Villages supports this, showing that 47% of over-55s contemplating downsizing have reconsidered their plans due to uncertainty around property taxes.

The housing market’s fragile state is echoed by the Intermediary Mortgage Lenders Association, which urges caution against any new property taxes, arguing they could stifle the market and have limited fiscal benefit. Brokers like Cameron Scott of Archie John Financial warn that such policies could accelerate an exodus of wealthy residents amid the broader backdrop of a rising cost of living, further dampening demand for high-value homes as lenders tighten mortgage valuations.

Former Institute for Fiscal Studies director Paul Johnson criticises the mansion tax and associated CGT rises, highlighting potential practical difficulties, especially concerning taxation of primary residences. His concerns underscore the challenge of implementing such measures without disrupting the housing market or reducing overall tax revenue. Similarly, former Bank of England governor Lord Mervyn King cautioned that adding more wealth taxes may not be the optimal solution to fiscal shortfalls, advocating instead for more thoughtful, systematic approaches to economic resilience.

Despite the controversy, a YouGov poll suggests public support for a mansion tax on homes over £2 million stands at 69%, with even higher backing (75%) for taxing assets above £10 million. This support, mainly from Labour, Green, and Liberal Democrat voters, contrasts with only 42% backing an increase in the higher rate of income tax and a mere 14% support for VAT hikes.

The range of whispers and leaks ahead of the Budget also includes potential wider reforms such as replacing stamp duty with a property sales tax applicable to homes sold for over £500,000, potentially affecting 22% of transactions. While this might shift the tax burden from buyers to sellers, experts warn it could further complicate the market and inhibit liquidity.

Rachel Reeves herself has been circumspect in public comments, reiterating the need to ensure fiscal resilience and adherence to fiscal rules but declining to confirm specific details about the mansion tax. Cabinet ministers have echoed this ambiguity, with Health Secretary Wes Streeting acknowledging economic challenges but pointing to some positive growth signs, and Housing Secretary Steve Reed notably avoiding direct answers about the tax.

The combination of policy uncertainty, fiscal pressure, and market anxiety places the housing sector at a critical juncture. Industry voices call for the government to reconsider punitive tax measures in favour of reforms such as overhaul of council tax and business rates, which may provide more stable and growth-friendly revenue streams. As London’s housing market braces for the Budget, the balance between fiscal responsibility and economic vitality remains delicately poised.

📌 Reference Map:

• Paragraph 1 – ^[1] (Express), ^[3] (Evening Standard), ^[4] (MPA Magazine)
• Paragraph 2 – ^[1] (Express), ^[5] (LBC)
• Paragraph 3 – ^[1] (Express), ^[3] (Evening Standard), ^[5] (LBC), ^[2] (Independent)
• Paragraph 4 – ^[1] (Express), ^[7] (MPA Magazine), ^[4] (MPA Magazine)
• Paragraph 5 – ^[2] (Independent), ^[1] (Express), ^[1] (Express)
• Paragraph 6 – ^[1] (Express), ^[6] (Evening Standard)
• Paragraph 7 – ^[1] (Express), ^[1] (Express)

Source: Noah Wire Services