The upcoming Budget in November has been hanging above the Savills Research desks like the sword of Damocles for some time now. We can be almost certain that tax rises are coming, and some of these may significantly impact the housing market and divert course from our main forecast scenario.

This could be through direct changes to taxation around property, which will shift the incentives that buyers are currently presented with when making their housing decisions. Or it could be through increases in the wider tax burden on certain segments of the population, which may reduce the ability of some prospective buyers to fund house purchases.

We know very little about the government’s plans thus far. There have been several options for property tax reform trailed in the media, none of which have been accompanied by much detail at this stage, and none of which are in any way guaranteed to happen.

The rumoured tax measures broadly fall into two categories: taxation on transactions, and taxation on holding or occupying. But even within these categories, there are widely divergent potential market impacts.

Transaction taxes

One of the first rumours to emerge over the summer was that Stamp Duty Land Tax (SDLT) in England would be abolished, and replaced with a tax on the sale of properties over £500,000. This type of intervention would likely see a boost in activity levels, as the barriers to transacting fall. Some of the tax saving may also feed through into an increase in house prices for those properties newly exempt. Only around a fifth of properties would trigger a tax payment under this system, compared to the 60% of properties that currently generate an SDLT payment. First time buyers in higher-value areas where a smaller proportion of properties currently fall under the nil rate threshold would particularly benefit. Scotland and Wales would be exempt from any changes, with responsibility for this type of taxation lying with the devolved governments.

However, pulling in the opposite direction is the suggestion that the Capital Gains Tax relief for primary residences could be removed for higher-value homes. This would act as a disincentive to move, particularly for downsizers who may have accumulated significant property wealth during the period they have occupied their property. However, while it is unclear where the line might be drawn, this measure is likely to target the top end of the market only, so would not have a significant negative impact on the whole of the mainstream market.

Holding taxes

The chances are that, as a quid pro quo for removing transaction taxes, the annual costs of holding a home would increase, potentially through reform of council tax to more accurately reflect current values. Older homeowners in larger, more expensive properties would feel the pressure from this the most, providing them with a financial spur to downsize as they become more exposed to the costs of staying put.

Greater movement in the downsizer market would open up more housing stock at the top of the ladder, providing more options to those looking to upsize. As such, it could have a trickle-down effect in the rungs below, generating more transaction activity across the market, particularly from home movers who have been relatively quiet in recent years. Regionally, this approach to taxation would amplify the trends already in effect; most home owners in the Midlands and North would see their annual holding cost remain steady or fall, while the additional burden would fall largely on London and the South East, possibly acting as a drag on prices. And the potential for the devolved governments in Scotland and Wales to follow a different path should not be overlooked.

Further detail needed

The largest impact on the mainstream market may be in how financial markets receive the Budget. Gilt rates have the potential to go up or down based on whether the City of London is convinced by the plan for economic growth which the Chancellor will set out, and this will have a knock-on impact on mortgage rates. We know all too well the impact this can have following Liz Truss’ mini-budget, although we think the prospect of very large swings in rates is unlikely this time round.

The prime markets are a different kettle of fish, and the changing tax environment is much more likely to have an impact on higher-value homes. We will be publishing our new price forecasts for the prime housing markets after the Budget, so we can fully account for the measures announced.

We will also be releasing a whole host of insights around what the Budget means for the mainstream market in the days following the event, so stay tuned for more information.

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