On budget

Rachel Reeves’s 30 October autumn budget rolled out substantial changes to property taxes, particularly affecting second homes, landlords and commercial property transactions. With significant adjustments to stamp duty land tax (SDLT) and capital gains tax (CGT), property investors, tenants, home buyers and sellers across the UK are likely to experience the ripple effects. Here, we break down the budget’s key takeaways from a property perspective and explore the potential consequences of these changes for the UK market.

Stamp duty surcharge on investors

From 31 October 2024, anyone purchasing a second home or additional property in England and Northern Ireland, or any purchase of a dwelling by a company, faces a 5% SDLT surcharge, up from 3%. For companies acquiring residential properties above £500k that do not benefit from a relief from the ‘enveloping’ rate of SDLT, the rate jumps to 17%, up from 15%.

If you exchanged before 31 October 2024, you escape these increases at completion if you do not vary or assign the agreement, and completion is not pursuant to an option.

Impact on buyers and landlords

The top rate of SDLT is now an eye-watering 19%. Combined with the restrictions on offsetting mortgage interest and the removal of CGT reliefs introduced in recent years, investing in residential real estate is looking less and less attractive. It therefore seems likely that the number of investment purchases will fall as the increased surcharge directly raises costs for investors in rental properties or holiday homes. For example, a second home priced at £300k would now incur an SDLT surcharge of £15k in addition to the £2,500 base SDLT cost, potentially discouraging would-be buyers from entering the investment market. The SDLT nil-rate band will also revert to £125k from April 2025, adding £2,500 to SDLT bills from this date, assuming the relevant property costs £250k or more.

The gulf between residential and non-residential SDLT rates is now larger than ever. Notably, there has been no change in the rules or rates for mixed-use or non-residential properties and more purchasers may pursue transactions that are not entirely residential, or will push to find a non-residential element to their transactions as a result.

The definition of residential land is (unavoidably, in our view) imprecise and its meaning has been challenged repeatedly in the courts and tribunals. Given the widening disparity in SDLT and the increasing attraction of attempting to claim the non-residential rates, the number of disputes may escalate. Does a grazing licence turn a manor house into a mixed-use purchase, for example? If that house and land cost £5m, the SDLT saved by successfully claiming non-residential SDLT rates (assuming the surcharge would otherwise apply) exceeds £500k. In an HM Revenue & Customs meeting with the Chartered Institute of Taxation and the Stamp Duty Practitioners Group in 2018, it was suggested grazing licences could justify a non-residential classification, but case law has been fickle in this regard (it may be potentially arguable that the grazing licence merely improves the amenity of the land, for example).

Landlords, meanwhile, may face tighter profit margins, as higher acquisition costs can eat into returns. Those considering expansion might hesitate, curbing demand for properties in this sector and slowing the growth of rental portfolios.

Impact on tenants

For tenants, this surcharge has the potential to tighten the rental market further, as fewer landlords starting or expanding their portfolios may reduce rental supply. In areas where rental demand remains high, such as London, tenants could feel the effects in the form of rising rental prices, intensifying affordability challenges for many.

CGT adjustments

In what came as a shock to many, the budget has frozen CGT rates for residential properties, while increasing rates for commercial properties, which are now in line with those for residential properties (at a top rate of 24%). It appears the government listened to the industry, and perhaps shifted the tax increase from existing portfolios (via CGT) to new acquisitions (via the SDLT rise discussed above).

This CGT change took effect from midnight prior to the budget and, undoubtedly, there will have been disposals on the day of the budget (perhaps before the speech) where the sellers faced a significant increase in their tax bill. It was anticipated that CGT would increase, and you could argue sellers should have disposed of assets prior to budget day, but it means that those selling property at 9am on 30 October 2024 incurred a CGT rate that was not public knowledge at the time. There does not appear to be a sensible rationale as to why the implementation date did not align with that of the SDLT changes (from 31 October 2024). While some transactions would have been rushed through, at least sellers would have known the resulting outcome of their actions.

Impact on commercial property sellers

For those holding commercial assets such as office spaces or warehouses, the CGT hike will reduce the net returns on sales, potentially deterring some investors from selling in the hope that rates will fall in the future. With profit margins affected, many commercial property holders may choose to hold on to assets longer, which is

likely to slow commercial property turnover in the short term. This has the potential to affect sectors that rely on a steady supply of commercial space, potentially stalling redevelopment projects or new commercial opportunities in the process. The CGT rise is not as great as many expected, however, and we anticipate that the government hopes sellers will not be put off transactions by the 4% increase in the top rate of CGT.

Impact on residential property sellers

For residential property sellers, the CGT freeze provides stability in an otherwise turbulent tax environment. Long-term investors with substantial gains will still face high CGT bills but the budget has not increased them, and any plans they may have had might remain viable. However, given the SDLT increase on the other side of their sales, landlords and investors may still find it challenging to profit from long-held residential assets in the face of the increased tax the purchaser will need to factor into their offer.

Stamp duty changes across the UK

While the budget changes are targeted at England and Northern Ireland, Scotland and Wales maintain separate tax structures, with similar surcharges for additional properties under their own systems. As a result, regional differences will remain.

In Scotland, the ‘higher rates’ additional charge (equivalent to the English 5% surcharge) is 6%. In Wales, the rate is 4%. The English rate, in comparison, is therefore relatively similar and not disproportionate. These regional differences mean prospective buyers looking at properties across borders will need to carefully consider the tax implications and the added cost of acquiring properties outside their primary residence in any part of the UK.

Key takeaways

The changes introduced in the budget will likely have notable consequences across the property market, including the following.

Landlords

Facing increased SDLT (if purchasing residential assets) and higher CGT on commercial sales, landlords may slow their property acquisitions and adjust rental prices if their competition reduces, particularly in high-demand areas. This could influence the rental market, potentially leading to higher rents, and exacerbating the current pressure on the cost of living.

Tenants

With acquisition costs higher for landlords and rental supply constrained, tenants may experience increased competition for properties and rising rents, particularly in urban centres and popular regions.

Residential sellers

Although CGT on residential properties has been frozen, long-term investors will still face tax liabilities on appreciated properties, affecting those considering retirement or significant portfolio changes.

Commercial sellers

The CGT hike on commercial property transactions will impact on net profits from sales, deterring some owners from selling. This could have a knock-on effect on the commercial property market, particularly if owners choose to hold on to properties until tax conditions become more favourable. Given many expected much worse, however, the impact may not be too great.

The government’s autumn budget 2024 presents a targeted strategy to increase revenue from the property market by focusing on second homes, rental properties and commercial assets. For home buyers, sellers, landlords, and tenants, these changes underscore the importance of a strategic approach to financial planning. With potential effects on everything from property supply to rental costs and investment returns, understanding these updates is crucial for navigating the shifting landscape of the UK property market.