Budget 2025 – what did and didn’t happen to property taxes?

There was more speculation prior to Wednesday's Budget than any other Budget in years. Rumours of property (and other) tax changes fed newspaper headlines for weeks. We saw the impact of this in our work. Many clients raced against the clock to buy or sell prior to Budget day. Their haste was understandable, given the same-day CGT increases of last year's Budget. It turns out this haste was unnecessary (but the concern was very understandable).

While headlines have been grabbed by sober facts (tax as a percentage of income now hitting record levels), many might agree the Budget included few tax revelations. Income tax (on employment earnings) was not increased across the board. VAT rates did not go up. Stamp duty land tax (SDLT) has not been overhauled or even played with. The question remains whether we might see a further need for tax raises in 12 months, as tax revenues continue to fail to meet public spending requirements.

So, what has happened? We set out below some key changes (relevant to real estate), together with a few words on how we think this could impact our clients.

1. The "Mansion Tax"

Widely leaked in advance, the Chancelor has introduced a "high value council tax surcharge" on properties valued above £2m. The charge is graduated, as follows:

Our view:

What will this mean for the real estate world? Not a huge amount for most of our clients. It will cause high value residential property sales to bunch below thresholds, in the same way properties used to bunch around SDLT thresholds before the "slice" system replaced the "slab" system (a small price increase used to have a dramatic SDLT impact at the thresholds, pulling the entire consideration into a higher SDLT band. Sale prices would bunch below the thresholds, as no one would pay a fraction over them).

The valuation systems are similar to those used for ATED. Revaluations will be required every five years. The administrative burden on the Valuation Office, appears to be significant (many will have seen the Valuation Office can already take many months to carry out their work – we presume this backlog will increase, unless plans are in place to recruit more employees).

Properties close to the £2m threshold will also suffer, because well informed buyers will anticipate the thresholds freezing and more properties dragged into charge over time due to inflation.

The typical developer is not building properties affected. The typical investor is not letting properties affected. We anticipate the problem being largely contained to the HNW real estate market, with knock on effects for anyone requiring the Valuation Office's services in the near future.

2. Increase of 2% in income tax on property income

Income tax rates on income earned from real estate is to increase by 2%. The logic is reasonable, there are no NICs compared to earnt income, and this goes some way towards levelling the playing field.

Each tax band will increase by 2%. Basic rate therefore moves to 22%, higher rate to 42% and additional rate to 47%.

Our view:

The removal of a full deduction for mortgage interest expenses caused a lot of people to look at putting real estate into companies. While the change this Budget might appear to add further weight to the argument to purchase investment property in a company, income tax bands on dividends are also increasing by 2%.

While the change looks reasonable in isolation, it isn't right to look at this additional 2% income tax in isolation. Landlords may be seen as a soft target for tax increases and have borne several in recent years. This is a further nail in the coffin of buy to let businesses. Over the last few years, CGT deductions have dramatically reduced, the inability to fully expense mortgage interest costs have caused many businesses to teeter on the brink of profitability, and this further 2% change will inevitably push more small landlords out of the sector. This might benefit the larger players as a rush to sell might push down prices and allow large landlords to increase their holdings.

Looking at the treatment of landlords as a whole (and this is before considering the impact of the Renters' Rights Act), it is fair to assume the sector will see more small landlords selling up as a result.

3. Capital allowances

Capital allowances (for those who understand and claim them) are a valuable tax asset when (for example) acquiring an investment property, renovating a business property or even paying a tenant an incentive which they use to fit out a property. It is a form of tax relief on qualifying plant and machinery installed in a building, sitting between the instant deduction for many business costs (such as employee costs) and the greatly delayed deduction for many capital costs (such as the purchase of a freehold office).

A new 40% first year allowance is to be introduced, however from April next year the writing down allowance for assets in the "main pool" will reduce from 18% to 14%. This will slow the rate allowances can be claimed at. It does not ultimately reduce the tax relief available, but it delays it.

Our view:

Given it is purely a timing point, it might seem minor to delay tax relief. The economy is not buoyant however with many businesses close to breaking point. A future tax relief is of no use if this reduction in capital allowances is the straw that breaks the back of a business, and it succumbs to insolvency before assets are fully written down. For those businesses with large capital allowance pools (and we appreciate the recent 100% allowances have greatly helped many businesses), they will need to ensure they reforecast and plan for this change.

4. Construction industry Scheme

Government is announcing regulations, for consultation, aimed at simplifying and improving the administration of the CIS. This will take effect from April 2026.

Our view:

We are not sure anything will be simplified. Proposals designed to simplify tax systems commonly do the opposite, and changes are inherently likely to lead to confusion and innocent mistakes. We would not be surprised if the result is a more onerous system, which might cause businesses to inadvertently trigger penalties. There is value in stability and consistency within the previous scheme. We anticipate clients needing to reexamine new rules to see how it effects their CIS processes, particularly given the penalties for CIS failures can quickly accumulate.