Labour’s latest proposals on property taxation have sparked fresh debate, with reports suggesting that Chancellor Rachel Reeves is weighing up the idea of introducing a levy on profits made when selling a home.
This comes on the back of recent speculation that the Government is also exploring significant reforms to stamp duty and council tax, as it searches for ways to address a £51 billion gap in public finances.
Currently, homeowners are not required to pay tax when selling their main residence if its value has risen since purchase – a gain usually referred to as a ‘capital gain’.
However, The Times has reported that Reeves may be looking at altering these rules, meaning sellers could face a tax bill if the profit from their sale exceeds a certain threshold.
In this piece, we outline the existing taxes applied when selling property, the amounts typically paid, and what changes could be on the horizon under Labour’s proposals.
What is capital gains tax?
Capital gains tax applies to the profit made from selling certain assets, such as second homes, rental properties, investments like stocks and shares, and some valuable personal items.
At present, it does not apply when someone sells their main residence – the home they live in permanently. However, reports suggest that Rachel Reeves may be considering changing this exemption.
The tax is only applied to the profit made, known as the ‘gain’, rather than the total value of the property or asset itself.
In addition, individuals benefit from an annual tax-free allowance of £3,000, meaning any gains below this threshold are not subject to capital gains tax.
How much is capital gains tax?
How much capital gains tax you pay depends on your income tax band. For those in the basic rate bracket – with earnings up to £50,271 a year – the rate is 18 per cent.
If your annual income is above £50,271, placing you in the higher or additional-rate bracket, the tax rises to 24 per cent.
However, things get more complicated if your capital gain pushes your total income over the basic rate threshold. In that case, part of the profit is taxed at 18 per cent and the rest at 24 per cent.
For example, imagine a landlord earning £30,000 a year. They bought a rental property for £200,000 and later sold it for £230,000, giving them a gain of £30,000.
After applying the £3,000 tax-free allowance, the taxable gain falls to £27,000. This pushes their total income for the year up to £57,000, above the basic rate limit.
As a result, £20,450 of the gain would be taxed at 18 per cent (£3,681), while the remaining £6,550 would be taxed at 24 per cent (£1,572). In total, the capital gains tax bill would come to £5,253.
It’s also worth noting that some selling costs, such as estate agent fees and legal charges, can sometimes be deducted from the taxable amount.
Older homeowners who have lived in their properties for decades and seen prices rise sharply could face some of the steepest bills if such a change is introduced.
What is private residence relief?
Private Residence Relief is the tax rule that allows homeowners to sell their main residence without paying capital gains tax, regardless of how much the property has risen in value.
Reports suggest that Rachel Reeves is considering either removing this relief or altering the way it works.
What is being suggested?
Reports from The Times claim that homeowners could soon face capital gains tax when selling their property, but only if the home is valued above a certain threshold.
The exact figure hasn’t been confirmed, but early suggestions point to a possible £1.5 million limit. If set at this level, around 120,000 households could be affected, with potential tax bills nearing £200,000 for higher-rate taxpayers.
For example, under current rates, a property bought for £800,000 and later sold for £1 million by a higher-rate taxpayer would attract a CGT bill of roughly £47,280, before any deductions.
Who would be affected?
The plans are expected to impact older homeowners most, especially those downsizing after years in the same property. People who bought decades ago and have seen significant price growth could face bills running into the tens or even hundreds of thousands of pounds.
To put this in perspective, Land Registry figures show the average London home in 1980 cost £25,732. Today, the average is closer to £561,000, while family homes in popular, gentrified areas are often worth double that.
If CGT were applied to such a home at today’s rates, a basic-rate taxpayer couple could face a tax bill of over £114,000 after deducting selling costs.
Mortgage broker Stephen Perkins warned that families in London and the South East would be hit particularly hard, with some wealthier households even considering leaving the UK.
Why is the idea controversial?
Critics have branded it a “mansion tax,” saying it unfairly penalises people who have worked hard to afford a good home.
Financial adviser Harps Garcha argued that many middle-class families have sacrificed for years to build wealth through property, expecting to use that equity in retirement. He warned that taxing them again — on top of stamp duty — would feel like a double blow.
Property experts also caution that such a move could stall the housing market. If wealthier homeowners hold on to properties rather than selling, it could reduce the number of larger homes available for younger families and limit the Treasury’s potential tax revenue.
Tom Bill of Knight Frank noted that transaction-based taxes often change behaviour and can end up raising less money than expected. He suggested re-banding council tax would be a fairer and more reliable option.
When could this happen?
Any announcement is likely to come in the Autumn Budget, expected in October or November. However, the timing of when the new rules would take effect is uncertain.
One concern is that if the tax were announced in advance, it could spark a rush of sales from homeowners trying to avoid the new charges. For that reason, the Government could opt to introduce the change immediately, as it did with the extra stamp duty for landlords last year.
What has already changed?
Capital gains tax has already become less generous in recent years. The annual tax-free allowance, once £12,300, has been reduced to £6,000 (April 2023) and will fall further to £3,000 from April 2024.
Reeves has also increased CGT rates for stocks and shares, moving them from 10% to 18% for basic-rate taxpayers and from 20% to 24% for higher earners, bringing investment income into line with property levies.
The Treasury’s stance
The Treasury has not directly addressed the reports, saying it doesn’t comment on speculation. A spokesperson said that the Government’s focus is on strengthening the economy through growth, citing planning reforms expected to boost the economy by £6.8 billion.
They added that ministers remain committed to keeping taxes for working people as low as possible, pointing to the decision in the last Budget not to raise income tax, National Insurance, or VAT.
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