Budget Countdown: 10 Potential Tax Hikes – and Why Investors Will Still Come Out Strong
The Government faces a “significant fiscal gap”, widely estimated at somewhere between £20 billion and £40 billion, and tax rises are firmly on the table. While no one outside the Treasury knows exactly what will be announced, several ideas keep coming up in discussions among commentators and policy watchers.
Below are 10 of the most talked about potential tax changes and what they could mean for property investors.
1. Property related taxes
Several property specific ideas have been floated. Most would hit higher value homes hardest, but a few could bite directly on landlords.
a) Stamp duty reform
One suggestion is to scrap stamp duty on the purchase of a person’s own home and replace it with an annual tax on higher value properties, for example homes worth more than £500,000. Investment properties may be carved out of this, so the annual charge would apply only to main residences.
What it could mean for investors
- If investment property is exempt, landlords might gain a relative advantage over high value owner occupiers
- Shifting cost from upfront stamp duty to an annual charge could change buyer behaviour in expensive markets, potentially softening prices at the top end and supporting demand for more modest homes.
b) Mansion tax
A mansion tax has also been discussed, a standalone annual levy on properties above a certain threshold, such as £1 million or £2 million. This would disproportionately affect London and the South East, where more homes sit above those values.
Impact on investors
- Owners of prime residential assets could see higher holding costs
- Some capital may rotate out of top end properties into mid-market or regional stock, potentially creating opportunities for investors targeting more affordable price brackets
c) Capital gains tax on main homes
Currently, profits on your own home are exempt from Capital Gains Tax. One proposal would be to retain this exemption only up to a certain value, for example the first £500,000 of the sale price, and tax gains above that.
Impact on investors
- Could discourage owners of large or highly appreciated homes from downsizing, reducing liquidity in expensive areas
- In those markets, more people may opt to stay put and rent out their existing home rather than sell, increasing competing rental supply at the upper end, but keeping demand strong for mid-market rental properties
- This change is seen as politically difficult and therefore less likely
d) National Insurance on rental income
Another idea is adding an 8% National Insurance charge on rental income. This is the only property specific measure that would directly hit landlords ongoing income.
Impact on investors
- If introduced, the immediate effect would be to squeeze net yields
- In practice, rents would likely be pushed up to compensate, which conflicts with the Government’s desire to ease housing costs
- For that reason, this particular measure is viewed as highly unlikely
2. Income tax rises and frozen thresholds
Raising the main rates of income tax by 1% to 2% has been widely discussed, for example increasing the basic rate from 20% to 21% or 22% and the higher rate from 40% to 41% or 42% percent.
In tandem, the personal allowance and higher rate thresholds could be frozen for longer. For instance:
- Basic rate threshold kept at £12,570
- Higher rate threshold kept at £50,270
As wages rise over time, more people are dragged into higher tax bands. This is a stealth tax increase via fiscal drag.
What this means for investors
- Landlords paying income tax on rental profits would see their tax bills rise both from higher rates and frozen thresholds
- Higher earning investors might be pushed more firmly into the 40% band, increasing the appeal of tax planning strategies such as incorporation, pension contributions or using family members lower tax bands
Dr. Tariq Mohammed, founder of property investment firm, Find UK Property warns that breaking the manifesto pledge not to raise income tax could be politically costly, but may now be seen as unavoidable:
“At first, they seemed determined not to touch the big three, income tax, VAT, or National Insurance, and instead raise funds through smaller, targeted measures like property or inheritance related taxes. But now, the gap is so large that the simplest route may be to break the manifesto promise and raise income tax directly. It is politically risky, but may be unavoidable.”
“Even if property taxes do rise, rental demand remains strong, and rents will simply adjust to cover costs. The fundamentals of supply and demand are still firmly in investors’ favour.”
3. National Insurance Restructuring
One idea is to reduce employee National Insurance contributions by, say, 2% while increasing income tax rates by the same margin. The thought is that workers paying NI would be broadly protected overall, while those whose income is not subject to NI, such as landlords and retirees, would bear more of the burden.
Investor implications
- Employment income remains roughly neutral, but rental income, dividends and interest, which do not attract NI, would face higher income tax with no offsetting NI cut
- This sort of shift would explicitly target unearned income, making tax efficiency even more important for investors living off investments or property
4. VAT, more businesses in scope
The standard rate of VAT may stay at 20%, but more businesses could be required to register and charge VAT. The VAT registration threshold currently sits at £90,000 of turnover. It could be reduced to £50,000 or even £30,000, pulling many more small operators into the VAT net.
There is also speculation that some currently exempt services, such as private healthcare, tutoring and certain charitable services, might become subject to VAT.
What this means for investors
- Small trades and service providers who work with landlords and developers, builders, cleaners, maintenance firms, lettings specialists, may have to add VAT to their prices, pushing up costs for property investors
- Investors running small property related businesses themselves, such as holiday lets, serviced accommodation, sourcing or management, may be forced to register for VAT sooner than expected
- Over time, more business inputs being subject to VAT can compress margins unless pricing adjusts
“Demand for rental continues to increase because house buying remains unaffordable for many, and renting is becoming more desirable due to Government changes to increase renters rights and have better property standards. Rental supply on the other hand is not increasing, in fact it is becoming tighter. So any cost increases for landlords will just pass through onto tenants, and overall investment returns will not be affected.”
5. Inheritance Tax and gifting rules
The core Inheritance Tax thresholds are expected to remain:
- £325,000 basic nil rate band per person
- Up to £500,000 per person if a main residence is passed to direct descendants
- Up to £1 million combined for a couple
Above these levels, IHT is typically charged at 40%. Currently, gifts made more than seven years before death fall outside the estate for IHT purposes.
A potential area for change is the gifting regime:
- Extending the seven year period to, say, ten years
- Tightening rules around large transfers of assets such as property to children later in life
Impact on investors
- Many investors use gifts of property in later life to reduce IHT. Extending the timeline would require earlier planning and potentially more complex structuring
- It could be harder to move properties out of an estate shortly before retirement and expect to avoid IHT entirely
- Overall, long term, intergenerational planning becomes more important
6. Pensions, tax relief and tax free lump sums
Pensions have already come into sharper focus for estate planning, as pension pots are now counted within the IHT estate. Two further changes are being discussed.
a) Flat rate pension tax relief
Currently, pension contributions receive tax relief at the contributor’s marginal rate, 20%, 40% or 45%. A shift to a flat rate, for example 25% relief for everyone, has been suggested.
Impact on investors
- Higher rate taxpayers would lose out compared with today, reducing the advantage of pensions over other investment vehicles for them
- Basic rate taxpayers might gain slightly, making pensions relatively more attractive for lower earners
b) Reducing the tax free lump sum
At present, many people can take 25% of their pension pot tax free, up to a maximum of £268,275. This tax free lump sum might be capped at a lower figure, for example £100,000.
Some investors have been drawing this lump sum and putting it into property, attracted by greater control, tangible assets and the ability to gift property to children. A smaller lump sum would dampen that flow of capital into property from pensions.
7. Capital Gains Tax rates
Capital Gains Tax rates on many assets, including residential property, currently sit below equivalent income tax rates, for example roughly 18% to 24% percent depending on the tax band. One well trailed idea is to bring CGT more closely into line with income tax, possibly in stages over several Budgets.
Investor impact
- Selling investment properties, businesses or sizeable share portfolios would become more expensive from a tax perspective
- Flipping strategies and shorter term holds could become less attractive, investors may pivot towards longer term ownership and refinancing instead of selling
- The timing of disposals would need closer attention, particularly if higher rates are phased in over time
“At first, they seemed determined not to touch the big three, income tax, VAT, or National Insurance, and instead raise funds through smaller, targeted measures like property or inheritance related taxes. But now, the gap is so large that the simplest route may be to break the manifesto promise and raise income tax directly. It is politically risky, but may be unavoidable.”
8. ISAs, squeezing cash allowances
The annual tax free allowance for Cash ISAs is currently £20,000 per person. There is talk of halving this to £10,000, nudging savers towards investments in shares and other productive assets rather than large cash balances.
What this means for investors
- Those who rely on cash ISAs for tax free interest may hit the cap more quickly, particularly when interest rates are elevated
- Reduced shelter for cash could encourage some savers to consider alternative assets, including stocks, funds or even property, for long term growth
- Landlords may find more potential investors looking at property as one of several routes to deploy capital outside cash
9. Windfall taxes on bank profits
Another idea on the table is a windfall tax on banks, particularly on the interest they earn from reserves held with the Bank of England. The theory is that this would encourage banks to lend more into the real economy instead of sitting on risk free income.
Impact on investors
- Direct effects on individual investors are limited
- Indirectly, if such a tax pushed banks to compete more aggressively for borrowers, that could support slightly better mortgage or development finance terms
- Equally, if banks chose simply to pass on the cost, it could keep lending tighter and margins high
10. Sin Taxes and Fuel Duty
Increases in so called sin taxes, on alcohol, tobacco and gambling, are perennial Budget favourites. Fuel duty, which has been frozen for several years, could also see an increase.
Investor implications
- Rising fuel and transport costs feed into broader inflation and can raise operational costs for landlords, for example maintenance, void periods, energy heavy HMOs or serviced accommodation
- Higher living costs for tenants may constrain how quickly rents can rise in some areas, even if landlords face higher costs themselves
So what does this all mean for investors?
Despite the long list of potential tax rises, the overall outlook for property investors remains more resilient than it first may appear.
As Dr. T puts it:
“Even if property taxes do rise, rental demand remains strong, and rents will simply adjust to cover costs. The fundamentals of supply and demand are still firmly in investors’ favour.”
Key structural trends continue to support the rental market:
- Affordability pressures: for many would be buyers, home ownership remains out of reach, keeping them in the rental sector for longer
- Improved renter protections and standards: Government changes to improve tenants rights and property standards make renting more appealing relative to ownership for some households
- Tight rental supply: new rental stock is not keeping up with demand and in some areas landlords are actually exiting the market
Dr. T summarises the likely outcome:
“Demand for rental continues to increase because house buying remains unaffordable for many, and renting is becoming more desirable due to Government changes to increase renters rights and have better property standards. Rental supply on the other hand is not increasing, in fact it is becoming tighter. So any cost increases for landlords will just pass through onto tenants, and overall investment returns will not be affected.”
In other words, tax policy may change the shape of returns, the best structures to use, and the timing of investments, but it is unlikely to overturn the basic economics of a market where demand for quality rental property continues to outstrip supply.
