The wave of downsizing about to hit the property market in the UK

The worst-kept secret of the Rachel Reeves Budget last week (and that is really saying something) was the new Mansion Tax. The 'High Value Council Tax Surcharge' — to give its full and proper name — comes in to force from April 2028, after which the owners of houses valued at £2 million or above-plus homes will need to fork out thousands of pounds more each year on top of existing council tax. The annual charge will range from £2,500 for homes between £2 million and £2.5 million, to £7,500 for £5 million-plus homes.

Treasury estimates show that around 160,000 homes in England — fewer than 1% of the total — will be above the £2 million threshold, though more homeowners could be hit as time marches on. Revaluations will be carried out every five years, and analysis in The Daily Telegraph suggests that around 30,000 more homeowners could be in the £2 million-plus bracket in the next three years as a result of house price growth.

The number of homes affected in London and the South-East dwarfs the figure elsewhere around the country, as our analysis last week showed. Around 125,000 homes in London and 20,000 in the Home Counties are expected to be hit by the charge, and that trend won't change as values rise.

Tom Bill, Head of UK Residential Research at Knight Frank, explains: ‘Over time, more properties will get dragged into the mansion tax net, which means the proportion of terraced houses, flats and semi-detached homes will grow, particularly in the capital.’

'Their property might have trebled, but their income hasn't': The asset-rich, cash-poor homeowners who will be hit hardest

The new levy is unlikely to put off wealthy homeowners, for whom the cost will be a drop in the ocean. Harry Dawes, of buying agency Dawes London, which operates in the rarefied prime central London market, says: ‘I think there will be some that are not in the position, from a liquidity perspective, to be able to cover another £2,500 bill, but I think they will be in the vast minority.’ In his view, it will have more of an impact on the needs-based country market.

But the mansion tax could be a headache for asset-rich, cash-poor homeowners. In other words, homeowners, particularly pensioners, who have owned their home for many years and are sitting on significant housing equity but don’t have the income to foot the new tax bill.

‘Those who will be hit hardest are retirees or long-term owners who bought their homes decades ago,’ explains Jason Tebb, President of OnTheMarket. ‘Their property value may have doubled or trebled, but their pension income has not. They could now be facing tax bills that exceed their disposable income.’

But the devil is in the detail. Reeves said the government ‘will consult on options for support or deferral', allowing those hit by the tax to put off payment until the day comes when they sell up. She didn’t elaborate in her Budget speech but it could have a major bearing on how the new levy plays out. The suggestion is that those who bought their home a long time ago will never be forced to sell up merely to cover the cost of the tax, but can instead defer the payment until the time comes that they either sell their home or pass away.

‘If they will offer support or deferral until the point of sale or death,’ says Ross D’Aniello, CEO and Co-founder at Chartwell Noble, ‘this removes the biggest source of pressure from the system — the need to find thousands of pounds in cash every year simply to stay in your home.’

A 'drop in the ocean' for buyers, the straw that breaks the camel's back for sellers

Regardless of deferral plans, the tax will still have to be paid at some point, and anyone living in a large, expensive home on a limited income is already likely to be struggling with soaring maintenance and energy costs. For those already toying with the idea of downsizing, the Mansion Tax could act as a powerful catalyst — the straw that breaks the camel's back, if you like — and prompt many to put their homes on the market.

And many experts across the property industry agree the prospect of paying more tax could galvanise some homeowners into action.

‘There are homeowners on reduced incomes or pensions who live in properties larger than they now need, and who have been aware that downsizing made sense but have had little real pressure to act,’ explains Edward Church of Strutt & Parker.

‘This additional council tax charge — modest when set against the value of these homes — won’t be the decisive factor on its own, but combined with improving market sentiment and the prospect of easing interest rates, could be enough to bring some previously hesitant sellers to market.’

This chimes with James Law, of Stacks Property Search, who says that asset-rich, cash-poor homeowners may feel pressured to sell up before the new levy kicks in. ‘However, many may prefer to defer payment until they sell, settling the back-dated tax from the proceeds,’ he adds.

Then there is the issue of pricing. Homeowners who sell homes near the threshold may have to brace themselves for increased price sensitivity. As Law points out: ‘Buyers looking just over the £2 million mark will almost certainly be able to negotiate the price down below £2 million, or secure a £100,000 reduction that would effectively cover the tax for several years.’

There are already reports of homes being re-priced in the wake of the Budget. And Law believes that for now, there's likely to be ‘a dearth of properties marketed between £1.995 million and £2.25 million’.

Buyers who've been on hold will get going — just as sellers bring their plans forward

So, what could this mean for the wider housing market? Many potential buyers are already feeling the pinch from recent economic and political headwinds - and Budget speculation has hampered activity.

According to D’Aniello, the £2 million-plus segment across most regional markets in central and south-central England has been muted for months. ‘Buyers have thinned out, and this may well thin them further,’ he says.

But if there is a clean structure for the new levy and certainty on timing, D’Aniello continues, activity could pick up. ‘Motivated buyers who have been waiting will move, and some sellers will bring plans forward to get ahead of any long-term liability,’ he says.

Nigel Bishop, Founder of buying agency Recoco Property Search, which covers the West Country and London, reckons the surcharge could dampen appetite for £2 million-plus homes among buyers who are financially stretched and those approaching retirement.

But in his view, it’s unlikely to be a roadblock for young, aspirational upsizers.

‘They want a bigger house, they've got kids, and they're earning good incomes. They will go for it,’ Bishop explains.

‘I think there will be tighter negotiations in terms of pricing. But at the end of the day, my experience is, if somebody really wants something and they've got to pay £2.25 million, and that's it, take it or leave it, they'll still go for it.’