Proposed Annual Property Tax for High-Value Homes

Homeowners with assets exceeding £500,000 might soon face an annual property tax as part of a bold strategy to replace the current stamp duty system.

According to reports, the Treasury is contemplating this new proportional property tax in its upcoming budget for the fall.

Instead of the existing stamp duty—which ranges from 2% on properties valued between £125,000 and £250,000 to a staggering 12% on amounts over £1.5 million—buyers of homes over £500,000 would incur annual taxes.

This existing system has contributed £13.8 billion to the Treasury for the 2024-25 tax year. Nonetheless, calls for its reform have grown due to its impact on homeowners.

How Will It Work?

While details remain unclear, it’s reported that the Ministry of Finance is considering ideas from a right-leaning think tank regarding the proposal.

Professor Tim Leunig from the London School of Economics, who initially suggested this plan last August, commented that the current property tax structure is “unrealistic and unfair.” He emphasizes that it raises transaction costs, hinders mobility for job opportunities, and stifles economic growth.

A property valued over £1 million would incur a tax of 0.81% on the portion exceeding a designated threshold.

The indications are that this new tax won’t apply retroactively, meaning only homes bought after its implementation will attract it. Additionally, the existing 5% stamp duty on second homes would still exist, and those owners would be exempt from the annual property tax.

Leunig’s proposal also includes eliminating council taxes and instituting a local government property tax of 0.44% on homes valued between £800 and £500,000, which could tally up to £2,196 annually. Properties exceeding £500,000 would contribute 0.54% to the government instead of paying stamp duty. For example, someone owning a home worth £650,000 would owe £3,006 yearly—this includes £2,196 for the first £499,200 and an additional £810 for the remaining value.

The Treasury appears to be weighing the idea of local property taxes “in the medium term,” potentially phasing out stamp duties.

The campaign group Fairer Share advocates for eliminating both stamp duty and council tax, suggesting an annual property tax of 0.48%. Andrew Dixon of Fairer Share described the proposed plan as “a step in the right direction,” expressing eagerness to collaborate with the government on long-term reforms that would create a modern property tax framework better suited for local services and reflects actual property values.

Recent reporting indicates that around 83% of UK homeowners currently pay lower property taxes compared to what they would under the old council tax system. Areas like London and the Southeast have seen significant price increases since the council tax assessment began in April 1991.

Dixon commented on the negative impacts of stamp duty, which he believes deters homeowners from moving, whether they are downsizing or looking for larger spaces as their families grow.

A Barclays survey with over 4,300 UK and Welsh homeowners revealed that around 85% feel they have one or more spare bedrooms. Notably, 73% of those surveyed were over 45 years old, and 37% were over 65. Furthermore, real estate firm Savills noted a drop in the share of buyers over 45, from 45% in the 2015-16 tax year to 39% in 2023-24.

About 41% of homeowners over 55 surveyed by Jackson Stop indicated they would consider downsizing within two years if stamp duty were lowered or removed.

David from Hamptons remarked on the implications of the government’s choices regarding recommendations. He noted that while the shift might lower costs for high-value home purchases, it would introduce a new annual ownership cost, especially given the inflated council tax in premium areas.

“The effects of the proposed changes will largely depend on the chosen tax rate and how quickly these changes would outweigh the current tax burdens,” he added.

The Treasury, for its part, has refrained from commenting on the speculation surrounding the budget.