Speculation that the Government could lower the proposed high-value council tax threshold from £2m to £1.5m is causing concern among homeowners, buyers and valuers, according to Knight Frank.
Reports emerged at the weekend that ministers may cut the proposed minimum high value council tax (HVCT), with further speculation that the Government may also consider changes to capital gains tax.
Tom Bell, head of UK housing research at Knight Frank, said the latest rumors represent a major change after months in which uncertainty over mortgage rates was the main concern for the housing market.
This speculation comes against a more difficult financial backdrop, with rising government borrowing costs and renewed concerns about inflation as conflict in the Middle East threatens to put further pressure on prices.
Bell said it was unclear whether the latest reports came from the Treasury Department.
I write in an analysis to accompany Knight Frank’s series finale Accommodation is not overcrowded He cited comments from James Nation, Rishi Sunak’s former special adviser at Number 11 Downing Street.
According to The Nation, advisors John Healey and Andy Burnham generally prefer to avoid speculation of this kind. Bell also suggested that the recent leak of a 50-page policy document prepared for former Prime Minister Keir Starmer may have contributed to the rumours.
Bell said the prospect of a £1.5 million jumpstart for the HVCT would be particularly important for parts of London and south-east England.
If the threshold is lowered before the proposed tax is imposed, he said, homeowners whose properties could reach the threshold in future years could begin to factor potential tax liabilities into their decisions.
The introduction of a floor can also impact negotiations between buyers and sellers, with properties likely to be priced below the relevant range to avoid being charged higher fees.
This could create distortions similar to those associated with the previous stamp duty bracket system, where relatively small differences in property prices could result in significantly different tax bills, Bell said.
This measure can also have different effects on different types of homeowners. While higher fees may discourage some homeowners from moving to larger properties, Bell said they can encourage homeowners to sell in an effort to avoid higher liabilities.
He warned that the policy could raise concerns about older, asset-rich homeowners being unable to afford the costs associated with remaining in their homes.
The lower limit would also create difficulties for property valuers, according to Knight Frank.
The company estimates that around 73,600 properties are currently worth between £1.8m and £2.2m, creating a significant gray area in valuation around a potential £2m threshold.
If the threshold was set at £1.5 million, Knight Frank estimates that the number of properties within the equivalent valuation range would rise to around 222,800.
This would more than triple the number of properties potentially falling into uncertainty surrounding the tax.
The debate has also highlighted fundamental differences in property values between London and other parts of England and Wales.
Using the nationally specified minimum floor area of 538 sq ft (50 sq m) for a one-bedroom house sleeping two people, Knight Frank calculated how much residential floor space could be purchased for £1.5 million in various local authorities.
In Kensington and Chelsea, where Knight Frank estimates average values at around £1,168 per square foot, £1.5 million would buy the equivalent of around 2.2 standard one-bedroom flats.
In contrast, in Hartlepool, the same amount could theoretically buy about 20 flats based on local average values.
The disparity becomes even greater when comparing prime central London to lower value parts of the country. At £4,000 per square foot for a one-bedroom property in prime central London, the equivalent amount would buy almost 29 times the floor space in Hartlepool, according to the analysis.
The figures underscore the regional impact of the tax based on property value, and the proposed measure is likely to have a markedly different impact depending on where a homeowner lives.
At present, the Government has not confirmed whether the proposed high value council tax threshold will be reduced.
But Bell said the latest speculation was likely to be watched particularly closely in areas where large numbers of properties were located near the potential threshold.
