UNWINDING ‘NON-DOMS’ STATUS

Changes to the tax treatment of overseas income and gains of ‘non-doms’ were confirmed, albeit with an exemption during the first four years of residence in the UK.

And the global assets of those resident in the UK for 10 out of the past 20 years were brought within the full ambit of the inheritance tax regime [though interestingly, this particular measure was not expected to be a big revenue raiser].

The impact of such measures will be most acutely felt in the markets of central London, which were already braced for changes in the tax environment and had seen a sizeable price adjustment in the preceding decade.

Predicting what impact this may have is not straightforward. After all, the Office of Budgetary Responsibility, the agency responsible for costing policy measures, noted “significant uncertainty around the size of the tax base and the behavioural response which is contingent on decisions made by a relatively small number of wealthy individuals.”

PREDICTING THE BEHAVIOUR RESPONSE

What we do know is that some of the ultra-high net worths most spooked by the changes will become resident elsewhere around the globe. However, the experience of previous tightening in the ‘non-doms’ regime in 2017 strongly suggests that many will retain a base in London.

It is also likely to temper the appetite of a certain class of buyer and result in a greater propensity to rent among those looking to come to London for a fixed period. The fourth and tenth anniversaries of taking up residence are likely to become particularly important in the decision to stick or twist.

And some downward pressure on central London prices is inevitable, given a wider range of buyers will face a higher stamp duty bill as a result of the decision to increase the SDLT surcharge for those buying a secondary residence or investment property by 2% (to 5% for those resident in the UK and to 7% for those non-resident).

This said, given everything London has to offer, the range of buyers in the market and where pricing currently sits, it looks like the market response in central London will be benchmarked against George Osborne’s 2014 stamp duty changes and the Brexit vote, when prices respectively fell by -4.5% and -6.5% in 12 months rather than anything more significant.

The US election result and ongoing global, geopolitical uncertainty have provided a timely reminder of London’s safe haven status, especially among younger buyers less concerned by changes in the tax regime. And this reduces the risk of a more severe market reaction.

OTHER STAMP DUTY IMPACTS

Elsewhere in the prime market, coastal second homes will feel the pinch from the stamp duty changes, especially given the discretionary nature of demand. This suggests they will remain price sensitive for longer than other parts of the market, which will more readily benefit from future Bank base rate cuts, corresponding with falls in the cost of mortgage finance and progressively more relaxed lending over the course of 2025.

With the transactional cost of buying a pied-à-terre in London rising, it will also be more costly to have a onein and one-out approach to home ownership. And so, a less immediately obvious impact of the Budget is the prospect of a further refocusing of demand to London’s suburbs and the core commuter zone among those looking to trade up the ladder, especially where there is a combination of good state and private schooling.

INHERITANCE TAX ISSUES

In 1986, former Labour Chancellor Roy Jenkins, described Inheritance Tax as “a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”. Some 38 years later, Rachel Reeves informed us that only 6% of estates would pay the tax this year.

Unsurprisingly, no mention was made of the fact that this would represent an estimated over 50% increase in the number of tax payers over a 5-year period. And so, while older home owners with significant property wealth will have been relieved to have seen prevailing inheritance tax thresholds retained, they will have been less enamoured by the prospect of no increases in their tax-free inheritance tax allowances until 2030.

This, together with changes in the tax treatment of pension pots, is likely to result in an increase in downsizing and mean more liquidity in the market, though not enough to create an imbalance between supply and demand, as upsizers benefit from a gradual loosening of lenders’ purse strings.

HEADING INTO THE COUNTRY

From an inheritance tax perspective, the bigger surprise was the news that Agricultural and Business Property Relief would be capped, with only 50% relief available on wealth in excess of £1m from April 2026. That has provoked the considerable ire of the farming community, given the potential impact on the future financial security of family farms. For this group at least, Roy Jenkins’ assessment seems wide of the mark.

Those financial concerns are likely to be less of an issue for buyers of “a house with land” than those acquiring “land with a house”, especially because the former group have many reasons to hold land, with the inheritance tax treatment often an added benefit.

And with at least some of that benefit retained, the attraction of enough acres to provide privacy and amenity which adds to the enjoyment of a prime country home is unlikely to be substantially diminished.

This said, there is little doubt that the top end of the market is more exposed to changes in the tax regime than the mainstream, meaning unusually, it is more likely to lag than lead a market recovery, essentially fuelled by the prospect of falling interest rates this time around.