Budget Insights and Market Implications: Navigating Unanticipated Adjustments in an Evolving Landscape
With the Autumn Budget arriving nearly four months after the party’s decisive 2024 General Election win, Napier Watt sees it as a stabilising force: “This budget offers an opportunity for people to make informed choices after months of speculation around government plans.”
Stamp Duty Surcharge on Second Homes Raised by 2%
Chancellor Reeves increased the stamp duty surcharge on second homes from 3% to 5%, effective 31 October 2024, to enable over 130,000 additional transactions for first-time buyers and home movers over the next five years. The rate for corporations purchasing residential properties valued above £500,000 also rose from 15% to 17%.
Although impactful, Napier Watt views the 2% surcharge increase as a moderate adjustment: “Most second-home buyers, typically motivated by securing a dream property, are unlikely to be deterred, given their financial flexibility to accommodate the added cost.” While there may be a slight, temporary decrease in transactions as the market adjusts, London, particularly the prime segment, is expected to demonstrate resilience.
Buyers also can apply for a refund on this surcharge portion if they sell their previous primary residence within three years. Although second-home markets have seen consecutive tax hikes since 2016, “discretionary income among this buyer segment generally allows them to absorb these adjustments, and demand remains robust in prime locations.”
Investors and Second Homeowners: Navigating New Fiscal Pressures
The anticipated freeze on capital gains tax for residential property, covering buy-to-let and second homes, provided short-term relief. However, the stamp duty surcharge hike on second homes quickly offset this, aligning more closely with Scottish rates. This change tightens financial conditions for those investing in additional properties, which may constrain the private rental supply and further support rent increases.
Fewer new buy-to-let investments are expected, while larger landlords are likely to reassess their future commitments amid intensifying regulatory and financial pressures. This shift suggests a reduced buyer pool for those exiting the rental sector, which faces growing operational challenges. Meanwhile, the limited impact of the mortgage guarantee scheme offers little additional support for first-time buyers in securing higher loan-to-value mortgages.
Inheritance Tax and Older Homeowners
Concerns of significant inheritance tax relief cuts for older homeowners were allayed as the £1 million allowance for couples on family homes remains intact. However, with more estates gradually falling within the inheritance tax threshold, some homeowners may feel encouraged to downsize, passing housing wealth to younger generations.
For agricultural and business property owners, inheritance tax relief will see a phased reduction starting April 2026, with the first £1 million continuing to benefit from 100% relief and a 50% rate applied after that. While this reduces, it does not eliminate tax advantages for such assets, with minimal expected impact on farmland values due to market scarcity.
Non-Dom Tax Changes and Prime Central London
Anticipated changes to the non-dom tax status have drawn particular attention within London’s prime property market. Moving forward, income and capital gains taxes will be based on UK residency, with deferral possible only during the first four years of UK residence. Notably, only foreign gains since April 2017 will be subject to new tax liabilities, avoiding retrospective exposure.
However, new proposals to bring worldwide assets under UK inheritance tax for those who have lived in the UK for 10 of the last 20 years may prompt some high-net-worth individuals to reconsider their residency. Despite this, demand for a London base remains likely. While these changes could temper interest in Prime Central London, we anticipate no substantial increase in market supply, as former non-doms still seek a London foothold. This adjustment may reinforce existing price sensitivity in the high-end sector, where values have stabilised after a peak over a decade ago.
For further guidance on these changes and personalised advice, don’t hesitate to get in touch with our Napier Watt team.
