So the dust has settled on the Labour budget and we can now take a look at how the policies will affect you and your investment strategy over the coming years.
Before we jump into that let us first highlight Savills response to the current state of the housing market. They have revised up their forecasts for growth and now expect some regions of the UK such as the North West and Yorkshire to see almost 30% capital growth over the next 5 years. Reduced competition among landlords will also see rents rise by almost 20% over this time period. Incredible news for property investors not so great for tenants in the private rental sector.
So to that budget and the big one, the increase in the Stamp Duty Land Tax (SDLT) surcharge on second homes, rising from 3% to 5%. This will add to the upfront buying costs and will naturally mean some people have to adjust or even shelve plans due to affordability. In our view this will shrink the number of buy to let purchases over the term of the parliament. If you can still afford to purchase though you will have reduced competition and benefit from being at the start of a new property cycle seeing both your rent and capital growth increase significantly over the next five years.
Anticipated adjustments to capital gains tax for second properties, however, did not occur, nor were there changes to inheritance tax rates, which may reassure many landlords.
Long term investors who see property as a source of retirement income and an asset for future generations will almost certainly continue regardless of the changes as even a small increase of say 1% in a properties value when owned with 75% LTV gearing will cover and the increased stamp duty cost with change.
Here is a summary of key changes in the budget for landlords:
Stamp Duty Land Tax
The government has raised the Higher Rates for Additional Dwellings in SDLT, effective October 31, 2024. Landlords, property investors, and companies purchasing residential properties, including second homes or buy-to-let properties, will now pay a 5% SDLT surcharge on the entire purchase price, up from 3%.
Additionally, former Chancellor Jeremy Hunt had extended the residential nil-rate threshold from £125,000 to £250,000, but this threshold increase will end on March 31, 2025. Consequently, properties purchased after April 1, 2025, for £200,000 will face an SDLT charge of £11,500.
A transitional rule applies for transactions already underway: if a contract was exchanged before October 31, 2024, but completion occurs after that date, the previous 3% additional rate still applies, sparing some landlords from the hike.
Non-UK residents buying residential properties in the UK will continue to pay a 2% surcharge in addition to the new rates, bringing their effective surcharge to 7%.
The overall increase represents a tax premium on BTL landlords, likely to reduce property purchases in high-value areas like London and the South East, which may drive rents upward. It should also see further movement from investors to areas such as Yorkshire and the North West hence Savills predicting these regions to see the highest levels of growth over the next 5 years.
Inheritance Tax
The inheritance tax (IHT) nil-rate band will remain at £325,000 until April 2030, meaning estates below this threshold will remain IHT-free, while those above it will face tax on the excess.
Starting in April 2027, inherited pensions will be subject to IHT, creating new estate planning considerations. Formerly exempt, these pensions will now be part of the taxable estate. This may lead some retirees to spend or gift pension savings. Family Investment Companies could become an attractive option for transferring wealth, particularly property wealth.
In April 2026, changes to agricultural and business property reliefs will apply. The highest relief rate of 100% will cover only the first £1 million of combined business and agricultural assets, with any amount beyond this threshold receiving a reduced 50% rate. This tiered approach may affect those with substantial holdings, making proactive planning advisable.
Additionally, offshore trusts, previously a way to shield assets from IHT, will no longer be exempt. Transitional provisions will be in place to provide some flexibility for those who previously structured assets under the current rules.
Capital Gains Tax
No change to the rates of CGT for residential property was the big headline here.
Capital Gains Tax (CGT) rates will increase, with basic rate taxpayers seeing a rise from 10% to 18% and higher rate taxpayers from 20% to 24%. These changes align CGT with existing rates for property sales, which remain at 18% and 24% for basic and higher rate taxpayers, respectively.
The Business Asset Disposal Relief (BADR) rate for CGT, currently at 10%, will increase to 14% on April 6, 2025, and to 18% on April 6, 2026. While this relief benefits landlords selling qualifying business assets, it remains limited for most landlord companies, as they are generally considered investments.
Non-domiciled Regime
The current non-domicile regime will be replaced with a residence-based regime starting in April 2025. Initially, a 50% reduction was proposed for UK residents receiving foreign income in the regime’s first year, but this reduction will no longer apply, making all foreign income fully taxable from the start.
For CGT, individuals using the remittance basis, past or present, may rebase their foreign assets as of April 5, 2017, for CGT calculations under certain conditions.
These changes as we have discussed will likely shrink the buy to let market further and put greater strain on the private rental sector. The NRLA have come out with string criticism as they point out that currently there are over 20 people looking to rent per property available in the England.
For investors that are able to buy you will have reduced competition and will benefit from the huge increases predicted in both rents and property values over the next five years. If Savills predictions for 30% price increases in the North West are accurate it would mean those clients buying with a 75% loan to value mortgage would more than double their money from capital increases along in just 5 years.
