Investors and second homeowners

As expected, the rate of capital gains tax on residential property (essentially buy-to-let investments and second homes) was unchanged, while it rose for other assets.  

But, any relief felt by those affected will have been relatively short-lived, as an unexpected increase in the Stamp Duty Land Tax second-home surcharge was just around the corner, bringing it more in line with Scotland.

That undoubtedly will tighten budgets for prospective second homeowners. 

However, the change will be felt more widely, as there is a risk that this further constrains the supply of private rented accommodation, which in turn will keep upward pressure on rents. 

New buy-to-let investors are likely to be pretty thin on the ground and even existing larger, wealthier landlords will think very carefully about how much they continue to invest. 

That means there will be a thinner seam of demand and fewer options for those looking to exit the sector, at a time when the regulatory burden on landlords keeps rising.  

This is especially the case as no meaningful support for first-time buyers was announced. While the mortgage guarantee scheme has been made permanent, it has generally struggled to make a significant impact on the availability of higher loan-to-value mortgages.

What will the impact look like?

According to our research, increasing that surcharge from 3% to 5% has the following impact on the Stamp Duty Land Tax liability for so-called “additional homes.”

Older homeowners and inheritance tax

Older homeowners might have feared a cut in the inheritance tax reliefs available to them. But, the additional threshold available to homeowners (which essentially allows a couple to pay no tax on the first £1m of wealth in their main home) remained untouched.  

Instead, we will see a more gradual increase in the exposure to inheritance tax, as more people are drawn within its ambit. This suggests a relatively slow and gradual increase in the incentive to downsize and pass housing wealth down through the generations.

Owners of land will benefit from less agricultural and business property relief with effect from April 2026. From that date 100% inheritance tax relief will be confined to the first £1m of such wealth, reduced to 50% thereafter. That will reduce, though not eliminate, the tax advantages of owning such assets, the impact on farmland values being limited by the ongoing scarcity of property brought to the market.

Getting behind changes to the ‘non-doms’ tax status 

Another key area that was closely watched by owners of prime property, particularly in central London, was prospective changes in ‘non-doms’ taxation.  

As expected, future exposure to income and capital gains tax will now be on a residence basis, removing the ability to pay tax only on revenues arising offshore as and when they are remitted to the UK (after the first four years in which an individual becomes a UK resident). 

However, more severe proposed changes have been shelved, and importantly, only gains arising since April 2017 on foreign assets will be subject to additional taxation. While that is two years earlier than proposed under the previous government it still limits any “retroactive” exposure to the tax.

More pertinent are the proposals to bring worldwide assets into the scope of UK inheritance tax where an individual has been a UK resident in 10 of the past 20 years. This change will cause some to question whether they remain a UK resident, or base themselves elsewhere. Instead, greater market reliance will be placed on domestic buyers and other overseas buyers. 

While this may dampen demand for Prime Central London property, we do not expect to see an increase in stock flood the market, with former ‘non-doms’ still keen to keep a base in the capital. 

But it is likely to mean the continuation of price sensitivity in a market where values peaked over 10 years ago, particularly at the top end.

Further information

Contact Lucian Cook