UK Government Shelves Plans for Mansion Tax and Capital Gains Tax Hike

Chancellor John Healey has reportedly shelved plans for a "mansion tax" on properties valued at over £1.5 million and ruled out aligning capital gains tax (CGT) rates with income tax, according to reports.

These proposed measures were part of the government's strategy to address a £35 billion budget deficit. The mansion tax, formally known as the High Value Council Tax Surcharge, was initially announced in November 2025 by former Chancellor Rachel Reeves. Under the original proposals, homes worth £2 million or more would face an additional annual tax of £2,500 to £7,500 from 2028. Healey had been considering lowering the threshold to £1.5 million, a move that would have encompassed an additional 145,000 properties.

CGT is levied on the profit made from selling assets that have increased in value, excluding a primary residence. For landlords and second home owners, this typically applies to property sales. Currently, higher and additional rate taxpayers pay CGT at 24%, while basic rate taxpayers pay 18%. Aligning CGT with income tax rates would have potentially raised these figures to 40% or 45% for some sellers.

Impact on Homeowners

The potential extension of the mansion tax to homes valued between £1.5 million and £2 million would have affected approximately 145,000 households, according to estate agent Hamptons. This segment includes many family homes in areas with high property values, particularly in London and the South East. Analysts warned that this could bring one in four detached homes in London under the tax's scope. For homeowners who had owned their properties for decades, purchasing them at significantly lower prices, an annual tax of £2,500 could have presented a financial challenge, potentially leading to sales or taking on lodgers.

Aneisha Beveridge, head of research at Hamptons, noted that ruling out the £1.5 million threshold provides certainty for homeowners. She explained that while a £2 million threshold primarily impacts the highest end of the market, lowering it to £1.5 million would have significantly broadened the number of affected homes, moving beyond the wealthiest households to a wider group, especially in southern England.

Implications for Landlords

Landlords have been facing increasing pressure from higher mortgage rates, stricter regulations, and tax changes, making profitability more challenging. A Money Mail investigation indicated that a typical landlord with a 75% buy-to-let mortgage needs a gross rental yield of 7.7% to break even. While a £3,000 annual allowance exists for CGT, significant property gains often result in tax liabilities for landlords unless offset by property improvements. For instance, a £100,000 gain, after the allowance, would have resulted in a taxable gain of £97,000. Under the previously rumored higher income tax-aligned rates, this could have led to a CGT bill of £38,800 to £43,650, compared to the current rate of 24%, which would result in a £23,280 bill.

Reasons for Policy Shift

According to the Financial Times, Healey's decision to abandon the CGT equalization with income tax was influenced by concerns that such a move would diminish Britain's attractiveness to investors. There was also a risk that higher CGT rates could discourage asset sales, potentially leading to lower overall tax revenue, mirroring the reasoning behind former Conservative Chancellor Jeremy Hunt's 2024 reduction of property CGT for higher-rate taxpayers from 28% to 24%.

The proposed reduction in the mansion tax threshold also faced internal opposition within the Labour party, with some MPs expressing concerns. Healey appears to have concluded that expanding the levy would be too controversial.

Treasury Revenue and Market Impact

Tax Policy Associates estimated that extending the mansion tax to properties valued at £1.5 million could have generated an additional £400 million for the Treasury annually, potentially doubling the existing revenue to around £800 million. However, this figure is not definitive, as such a tax could also reduce the attractiveness of higher-value homes, potentially lowering market values and thus tax receipts.

The effect of aligning CGT with income tax rates on investor behavior and tax revenue is difficult to predict, with some estimates suggesting increased revenue and others forecasting a loss. Beveridge of Hamptons suggested that introducing the High Value Council Tax Surcharge for homes at the £1.5 million mark could have suppressed prices at the higher end of the market. While shelving the proposal may not immediately transform market conditions, it removes a significant source of uncertainty for buyers and sellers in the £1.5 million price range.

Alternative Taxation Measures

While the mansion tax and CGT hike have been shelved, other tax changes are on the horizon for landlords. From April 2027, rental income will be taxed at rates two percentage points above standard income tax rates. This means basic rate taxpayers will see their rental income taxed at 22% (up from 20%), higher rate taxpayers at 42% (up from 40%), and additional rate taxpayers at 47% (up from 45%). The Office for Budget Responsibility estimates this measure will generate £500 million annually for the Treasury starting in the 2028-29 fiscal year.

Further potential changes for landlords, though currently unsubstantiated, include the possibility of National Insurance contributions being applied to rental income. Rumors also suggest the government might consider new property or land value taxes as replacements for stamp duty or council tax, or both.