"There are several legal strategies property owners can explore to mitigate the impact of a CGT increase. Trusts, for instance, can be used to potentially defer or reduce CGT liabilities"
- Daniel McAfee - Lawhive
The Chancellor has previously stated that she wants to only make major tax and spending announcements once a year, in the Budget. It was, therefore, expected that the Spring Statement would be limited, with the Chancellor largely responding to the OBR’s second forecast of the financial year. However, speculation is now growing that there might also be some policy announcements.
In light of this, here are a few areas where a policy change would impact homeowners and those purchasing property.
Stamp Duty
Stamp duty thresholds were raised in September 2022 to stimulate the housing market. First-time buyers saw the threshold rise from £300,000 to £425,000, while other buyers saw it climb from £125,000 to £250,000, leading to significant tax savings and even full exemptions for many buyers.
What might change?
On April 1st, the inflated thresholds are set to revert to their pre-2022 levels, unless they are extended.
However, the many rumours of an extension are likely just that, with little indication from the government that a last-minute U-turn will happen. So far, Reeves has shown no interest in keeping the higher thresholds beyond the April deadline, particularly as the £22bn budget deficit still needs to be addressed and Stamp Duty is likely to play an important part in this.
Capital Gains Tax
There’s speculation that the Chancellor may try to raise money by targeting landlords and second-home owners and increasing the capital gains tax on profits from the sale of assets, including property that is not your main home. Higher and additional rate taxpayers currently pay 24% CGT, but there was speculation before the Autumn budget that it could rise to 40 or 45%, in line with income tax. This led to a rush of second-home owners trying to complete sales before any tax rise was implemented.
However, raising the tax might backfire, as investors may decide not to sell their assets, which could lead to a fall in CGT receipts. What is likely, however, is a more modest rise. This might generate a small rise in takings.
Daniel McAfee, Head of Legal Operations at Lawhive shares his thoughts on the legal implications of increasing Capital Gains Tax:
"An increase in CGT directly impacts the net profit realised from the sale of a property that isn't the primary residence. This means landlords and second-home owners will face a larger tax burden upon disposal of their assets. Legally, this translates to a greater financial obligation to HMRC. We'd see increased scrutiny on valuations, potential disputes over allowable expenses, and a greater need for meticulous record-keeping."
“If the CGT increase is applied retroactively, it could lead to significant legal challenges. Contracts that were agreed upon under the assumption of a specific tax rate would suddenly be subject to a higher liability. This could result in disputes, potential breaches of contract, and even litigation.
"We'd need to examine the specific wording of existing contracts to determine whether they contain clauses that address changes in tax law. An immediate increase, while less contentious than retroactivity, would still require careful consideration of completion dates and the timing of tax payments."
"There are several legal strategies property owners can explore to mitigate the impact of a CGT increase. Trusts, for instance, can be used to potentially defer or reduce CGT liabilities. Other strategies might involve utilising allowable deductions, timing sales strategically, or exploring business asset disposal reliefs, if applicable. It’s crucial to seek out expert legal and tax advice to ensure any mitigation strategy complies with current legislation and avoids potential pitfalls to ensure that any planning is not considered tax evasion."
Support for Mortgage Interest
SMI is a state loan to help benefit claimants pay mortgage or home improvement loan interest, payable to those receiving Universal Credit, Pension Credit and some other benefits. While SMI loans are not interest-free, they can be helpful in reducing mortgage payments.
How might this change?
With significant welfare budget cuts likely, SMI could well be in the firing line.
The government currently spends in excess of £137bn annually on benefits and, as a result, the chancellor is unlikely to raise taxes when reducing public spending is a more palatable option. This could open the door to schemes such as SMI being scaled back or even scrapped.
Council Tax
Council tax bands in England and Scotland are based on 1991 property values, while in Wales, they are based on 2003 values. Due to these outdated valuations, council tax now has little connection to current home values.
Re-evaluation has been avoided by successive governments due to significant house price inflation, especially in the Southeast since 1991. The core issue is that many long-term residents of expensive homes, especially older people who have lived there for decades, have limited cash flow despite owning valuable assets. They would struggle to afford a substantial tax increase and have limited downsizing options.
However, a re-evaluation that avoids excessive tax increases by using a regional index to benchmark taxes in the southeast could potentially be on the cards. Daniel McAfee explores the legal implications of this.
“From a legal standpoint, the potential for challenges is significant. The human rights arguments, particularly regarding the elderly and vulnerable, are compelling. The Equality Act implications are also a major concern. The government needs to tread very carefully to avoid accusations of discrimination.”
“The proposed regional indexing system, while potentially a step in the right direction, introduces its own set of legal complexities. Regional boundaries, index calculation methodologies, and the potential for perceived unfairness all need to be meticulously addressed. Transparency and clear, objective criteria are absolutely essential.”
“The administrative hurdles are immense. Re-evaluating millions of properties is a logistical and legal minefield. We're talking about a process that will require significant resources, legislative changes, and a robust appeals system.”
“Ultimately, the success of any re-evaluation will depend on the government's ability to balance the need for a fairer system with the need to protect vulnerable residents. This means implementing strong legal safeguards, such as hardship exemptions and deferral schemes, and ensuring that the process is transparent and accessible."
Lifetime ISAs
Often used by first-time buyers to get on the property ladder, Lifetime ISAs are a tax-free way to save up for a property. The government will add a 25% bonus (up to £1,000 annually) on your contributions, but you must be aged 18-39 to open one and can contribute until age 50.
However, the home must cost less than £450,000 - a threshold that has remained the same since 2017 despite rising house prices. If savers use the money to buy a property that is over the scheme's £450,000 limit, they face a 6.25% withdrawal penalty, meaning that someone who has saved £20,000 could face only getting back £18,750 of their money if they choose to take it out.
What could change?
The Government has long been pressured by consumer rights advocates to reduce the LISA withdrawal penalty and raise the property price cap, particularly in light of the significant house price growth seen over the past few years which has seen many LISA holders exceeding the £450,000 limit, leaving them unable to use their savings without incurring stiff penalties.
Despite the previous government failing to address the issue, Reeves has so far made no indication she will either, leading to further frustrations among campaigners.
“The government wants to help people achieve their dream of home ownership but the Lifetime ISA in its current form can be more hindrance than help for many individuals," explained Laura Suter, director of personal finance at AJ Bell, “Rachel Reeves should seriously consider reducing the exit penalty to 20% so that savers only give up the government bonus if their withdrawal circumstances trigger the charge.
"The government implemented a temporary reduction in the charge during the pandemic to avoid penalising anyone forced to take their money early when the economy ground to a halt.
"It should now make that measure permanent to avoid putting people off using a Lifetime ISA.”
As part of Labour’s five missions for the government, Kier Starmer promised: “It’s time to get Britain building again." Let's see if Reeves can hold the property ladder for homeowners safely, rather than kicking it from under their feet.
