A new property tax reportedly being considered by Rachel Reeves could charge families inheriting homes on top of existing levies
Rachel Reeves is reportedly considering a shake up of the property tax system – a move that has the potential to leave some bereaved families paying two levies on the sale of an inherited home.
The Chancellor is said to have asked Treasury officials to look at a new property tax on the sale of homes worth more than £500,000 as part of a possible overhaul of stamp duty and council tax.
The national tax would be paid by the owner-occupier, not the buyer, with the rate set by the Government, which would directly collect the proceeds via HMRC.
This could mean that, although the details are yet to be confirmed, families looking to sell inherited homes worth more than £500,000 could potentially end up paying both inheritance tax (IHT) and an annual property tax.
Although effectively replacing council tax, only those inheriting homes of more than half a million pounds would face the levy.
Laith Khalaf, head of investment analysis at AJ Bell, said: “In the case of a family inheriting a property that would presumably not exempt them from any IHT that might be due, however it seems likely they would only then pay the annual property tax if they continued to own the property, rather than simply selling it and distributing the cash amongst the beneficiaries.”
The Treasury officials considering the changes are said to have been considering the arguments made in report last year by Tim Leunig of the Onward think-tank.
He suggested an average rate of 0.44 per cent would replace council tax income, adding the national rate could be 0.54 per cent for homes between £500,000 and £1m, and 0.81 per cent on any value above.
Mr Khalaf warned that any changes to property tax could be difficult, politically, especially as Labour made ensuring people “have more money in their pocket” a key campaign pledge in 2024’s general election.
He said: “Tax reform would be a laudable aim for Reeves to pursue, but it may also prove challenging while raising tax revenues at the same time, both politically and financially.
“Property taxes in particular are highly emotive and likely to elicit a strong reaction among voters if they are seen to be on the up.”
IHT is charged at a rate of 40 per cent on assets above the £325,000 nil-rate band, with an additional £175,000 allowance if the main residence is passed to direct descendants.
Changes in the autumn Budget also mean there will be up to 40 per cent IHT charged on unspent private pension pots from April 2027, which is expected to raise about £1.5bn annually for the Treasury by 2029-30.
Heather Powell, a partner at Blick Rothenberg, added: “The imposition of a selling tax, at a rate still to be set by the Government, is a massive disincentive for anyone looking to downsize, especially if they are managing their estate to ensure that they will not have a liability to IHT.
“Why would parents volunteer to pay a property tax on the sale of their property, and reduce the legacy they leave their children?”
Experts have warned that as news of a new property tax is “pure speculation” at the moment, anyone in the process of buying or selling home shouldn’t let it impact their current plans.
Sarah Coles, personal finance expert at Hargreaves Lansdown, said: “If there was some kind of tax payable by the seller, then there is a risk that someone inheriting a property worth over £500,000 would need to pay IHT, plus whatever a theoretical new sales tax entailed.
“Fortunately, there’s a decent chance that they wouldn’t have to pay IHT at all, because only a small fraction of people do.
“If the person who died was the surviving member of a married couple, and the property was going to their children, they might have IHT nil rate bands of up to £1m to protect them.
“We know that inheritance tax is widely hated though, so there’s every chance that another tax payable on the estate of someone who passed away might feel like it would add insult to injury.”
The new property tax would be part of a possible overhaul to stamp duty which is currently paid by those buying a new home.
First time buyers have to pay it for a property valued at £300,000 whilst it is £125,000 for everyone else. Second home owners have to pay an additional 5 per cent.
Tom Bill, head of UK residential research at Knight Frank, said: “The risk of such an approach is that it penalises individuals who are asset-rich but cash-poor, which is often the case when a person has lived in the same house for a long period of time.
“An arbitrary cut-off of £500,000 also risks creating distortions in the property market like those we saw under the old slab stamp duty system.”
Stamp duty has been controversial, as critics say its existence can stop people from moving, and being able to access properties that are appropriate for them.
Richard Donnell, executive director at Zoopla, said: “There are strong economic reasons for reform but there are political risks and the benefits of change can take time to become apparent.
“Everyone would welcome the removal of stamp duty, it is a hugely inefficient tax that acts as a major drag on the housing market, discouraging people from moving and downsizing. The challenge is that stamp duty raises significant money for the Treasury – £10bn to £12bn a year.
“Reforms to council tax alongside a new tax on homes over £500,000 to replace stamp duty would replace the lost revenue by spreading the cost across more households. This would hit homeowners across southern England which has most higher value homes.”
“This would create a lot of short term disruption and uncertainty to the market with the risk of cliff edges appearing around any value thresholds. The longer term opportunity is to get more people moving home which will help support economic growth and labour mobility.”
The Treasury has been contacted for comment.