Introduction To How Reeves Mansion Tax Could Reshape Property Tax Planning

With Rachel Reeves facing a £20bn budget hole and having been told by her backbenchers that they will not pass a Budget that breaks Labour’s election manifesto commitment not to raise rates of income tax, she has been left scrabbling around for other ways to raise tax revenue to comply with her two “non-negotiable” fiscal rules.

These are that current Government spending is matched by tax receipts and reducing Government debt as a share of the economy. One way to raise tax revenue would be to introduce what has been dubbed a “mansion tax” on expensive homes that are owned predominantly by people who are not natural labour voters and for whom the majority of labour MP’s and supporters will not have much sympathy in order to fund the removal of the current two-child cap on child benefit which will benefit many natural Labour voters in Northern constituencies. In other words, a “mansion tax” is something that Labour MPs will not oppose and some may rejoice in, will be almost impossible to avoid and will raise a lot of tax revenue from the more prosperous and successful hard-working and/or retired members of society.

What is meant by a “mansion tax”?

A new mansion tax may involve an annual tax on homes worth £2m of 1% on the value in excess of £2m. This will of course predominantly hit homes in the South East of England and be in addition to the Stamp duty, Council Tax, Inheritance Tax and Capital Gains Tax that already apply to homes.

What is the proposed mansion tax?

Reeves mansion tax seems to involve three possible alternatives. First, to abolish the long-standing exemption from Capital Gains Tax on the sale of one’s only or main residence, either for all homes or just for homes worth more than £1.5m (coincidentally, the threshold at which the top rate of Stamp Duty kicks in).

Second, to impose what is called a “Proportional Property Levy” charged annually on owners of homes in order to abolish Council Tax and Stamp Duty. Third, to turn-up Council Tax massively with a super rate on homes in Council Tax bands F, G and H combined with a revaluation of residential properties, the values of which were last set in England on 1 April 1991.

Is a mansion tax a stealth wealth tax?

In effect, yes, because if it is set at £2m, it is a tax on the prosperous, hard-working, successful members of society who have acquired relatively modest wealth in the form of owning a home.

It is stealthy because such homes were acquired without any awareness that such a tax would be imposed, and its effect on home values will be devastating. The property market is likely to suffer a massive slowdown, leading to a reduction in SDLT and CGT receipts, not to mention the taxes associated with property market activity, such as income tax, corporation tax, VAT and Landfill Tax and thus a new mansion tax would cannibalise the existing taxes.

Has a mansion tax been formally announced?

It is expected that some form of mansion tax will be formally announced in the Budget on 26 November 2025.

Who would be affected by a potential mansion tax?

According to The Times, around 150,000 homeowners would be caught if the threshold were set at £2 million, with nearly one-fifth of properties in Kensington and Chelsea made liable. Many of the owners caught up in a mansion tax will be retired and without the financial means to afford the annual levy from their fixed pension income, and so measures may have to be introduced to allow them to defer the mansion tax until their home is sold, adding to the administrative complexity of the tax.

Home values at or around the mansion tax threshold are likely to collapse, and so family members inheriting such properties will experience a destruction in the value of their inheritance.

How may the mansion tax impact SDLT and Council tax?

A simple levy on homes worth £2m or more would not require changes to Stamp Duty and Council Tax. However, if the mansion tax was introduced as a “super” Council tax then it is likely that the highest Council Tax bands F, G and H would be super-charged by effectively doubling the amounts levied at these bands or through a revaluation of homes. Another suggestion is a proportional property levy would work by charging 0.44% on the value of a house up to £500,000 (which would replace Council Tax), then 0.54% on the value between £500,000 and £1m and then 0.81% on the slice of value above £1m (with these two higher levies replacing stamp duty). So, a house worth £750,000 would pay tax each year of £3,550 and a house worth £1.5m would pay £8,950.

The proponents of this idea suggest that it would raise enough revenue to enable Council Tax and Stamp Duty to be abolished but they admit that there would be more losers than winners under their proposal and you couldn’t charge the higher rates to owners of existing homes who had already paid Stamp Duty when they bought their home.

Will valuations be updated annually?

Annual revaluations would be unlikely due to the administrative burden and cost of doing so. However, there is a precedent for uprating values every five years as happens with the Annual Tax on Enveloped dwellings or ATED.

Will there be any exceptions, and if so, how will they be applied?

Until the new tax is announced, no details are available; however, a few thoughts occur. First, if the new tax replaces Stamp Duty it would be fundamentally unfair to impose the tax on homes where the current owners have paid that tax when they acquired the home so that any new tax should only apply to homes purchased after the introduction of the new tax. Secondly, homes that are already liable to the ATED should not also have to bear a mansion tax given that the new tax would effectively tax such properties twice.

Third, fairness demands that there should be a long period between the announcement of a new mansion tax and its introduction to enable affected homeowners to downsize or otherwise plan for its introduction. This of course raises the elephant in the room of the effect of a new mansion tax on property values and which means that the very introduction of a mansion tax will cause homes at or around the threshold to collapse in value as buyers shun such properties, thus causing them to fall in value below the threshold and to create a cliff-edge at the threshold.

Would non-UK residents be liable for the mansion tax?

It seems inconceivable that under a mansion tax, Rachel Reeves would provide an exception for non-UK residents.

Could trusts or corporate ownership structures be affected?

Again, it seems inconceivable that under Rachel Reeves, the mansion tax would provide an exception for trusts and corporates. However, the existing favourable tax treatment of trusts for vulnerable persons might be carried over into a new mansion tax.

When could any changes take effect?

Because of the complexity and administrative burdens involved in the introduction of a new mansion tax, it is likely that the new tax may not be fully introduced until 2028; however, its effect on property values, selling and buying activity, and home building would be pretty immediate and devastating.

Conclusion

Rachel Reeves said recently that Labour was elected on a commitment to put national interest before political calculation. As with many things Rachel Reeves says, the opposite is true.

A new mansion tax will be the result of a political calculation by her that she could not get a much needed rise in income tax in the national interest past her backbenchers in the Budget because it would break her foolish General Election manifesto commitment not to do so and so she has had to resort to the concept a new mansion tax as a matter of purely political interest.

Please be sure to look out for more pieces on this website once the Budget has been announced on 26 November 2025.