Budget 2025: A Balancing Act

This afternoon, the Chancellor Rachel Reeves delivered her second Budget to the House. Speculation about what it would contain had been widely reported since the end of the summer. In what has at times appeared to be a chaotic run into the Budget, the situation was compounded further when the Office for Budget Responsibility (OBR) accidentally leaked its contents just 30 minutes before the Chancellor took to her feet.

However, once on her feet, Rachel Reeves announced that this was a Budget about rebuilding our economy. She called it a Budget of stability, investment and reform, a platform from which British ambition can finally get moving again.

Rachel Reeves faced a formidable challenge - closing a £30bn fiscal gap without breaking Labour’s tax pledges, while restoring confidence in the UK’s economic direction. Her approach was pragmatic - raising revenue through targeted measures and fiscal drag rather than sweeping reforms.

For housing, the headlines were modest for most. Two key announcements - a council tax surcharge on homes over £2m and an increase in property income tax - will affect only a small slice of the market. For the mainstream, the Budget offered clarity rather than disruption - no radical stamp duty overhaul, no new property tax regime.

Sometimes, though, it’s what isn't said that matters most. The absence of a new Help to Buy scheme will disappoint housebuilders and leave first-time buyer support largely unchanged, at a time when transaction volumes remain subdued.

Overall, this was a Budget aimed at stabilising the ship, not making waves - providing a clearer backdrop for the housing market to move forward, even as prime segments brace for fresh headwinds.

Key announcements

• - Council Tax Surcharge - From April 2028, properties over £2m will pay an annual surcharge of £2,500–£7,500, expected to raise £0.4bn in 2029–30.
• - Dividend, Savings & Property Income Tax - Dividend tax rises by 2 percentage points from April 2026; savings and property income tax rise by 2 points from April 2027, raising £1.2bn and £0.5bn each annually.
• - Income Tax Threshold Freeze - Continues for two more years, raising £8.3bn. Student loan repayment thresholds frozen for three years from 2027–28.
• - Minimum Wage - From April, minimum wage increases to £12.71 (4.1% rise); ages 18–20 rise to £10.85 (8.5% increase).
• - Salary Sacrifice NICs - From April 2029, contributions above £2,000 will lose NIC exemption, raising £4.7bn.
• - Fuel Duty & EV Tax - 5p fuel duty cut remains until Sept 2026, then phased out. EVs taxed at 3p per mile from April 2028.
• - Business Rates - Lowered for retail, hospitality, and leisure; higher for high-value properties. Revaluation in 2026.
• - Writing Down Allowance - The writing down allowance allows companies to reduce the amount of profit that is taxable. From April 2026, this allowance will be reduced from 18% to 14%, raising £1.5bn by 2029-30.
• - Two-Child Limit - Removed from April 2026.

Council Tax surcharge on high-value homes

What’s been announced?
From April 2028, the Government will introduce a council tax surcharge on properties valued at over £2 million (in 2026 prices). The surcharge will apply on top of existing council tax bills and will be paid to central government, not local authorities.

• - Structure - Four price bands, starting at £2,500 per year for homes in the £2m–£2.5m range, rising to £7,500 for properties worth £5m+. Charges will be uprated annually with CPI.
• - Scope - Applies to owners, rather than occupiers, of properties identified by the Valuation Office Agency during a targeted revaluation exercise in 2026. This revaluation exercise will occur every five years.
• - Revenue impact - Expected to raise £400m annually by 2029–30, according to OBR costings.
• - Reliefs - Some exemptions and a deferral scheme for cash-poor owners will be consulted on.

What could this mean for the market?
The introduction of a council tax surcharge on homes worth over £2 million is unlikely to send shockwaves through the prime market overnight, but it does add another layer of complexity for buyers, sellers and owners at the top end.

For ultra-wealthy purchasers, the annual charge - starting at £2,500 and rising to £7,500 for the most expensive homes - will feel modest compared to overall ownership costs. Yet, for house-rich, cash-poor owners, particularly in London and the South East, this could tip the balance toward downsizing, even if stamp duty remains a major deterrent. We estimate that around 88% of affected homes will be in London, particularly in boroughs with artificially low council tax rates such as Wandsworth, the City of London and Westminster.

The bigger story may be behavioural. A hard threshold at £2 million creates a clear cliff edge, echoing distortions seen under the old stamp duty slab system. Homes priced just below the line could become more desirable, while those above may face pressure to adjust asking prices or bunch around band boundaries. Buyers, wary of future liabilities, may negotiate harder - especially in markets already grappling with weak sentiment.

In the short term, these effects will be subtle. But the longer-term risk is more significant. This surcharge marks one of the first steps toward taxing property wealth rather than transactions. If future governments raise rates or lower thresholds, the impact on values above £2 million could deepen, widening the gap between homes inside and outside the levy. A re-valuation exercise every five years may also see more homes pulled in or moved into higher bands. That risk comes at a time when prime homeowners have already absorbed falling values and hefty stamp duty bills, adding yet another headwind to liquidity at the top end.

Implementation will not be straightforward. Valuing properties that haven’t sold for decades will invite disputes and appeals, prolonging uncertainty and potentially slowing transactions. Around 30% of properties in England have not changed hands since Land Registry records began in 1995, making comparables scarce. There will, however, be a revaluation every five years, raising the question of whether a £1.9m home today will be brought into paying the tax in subsequent years.  

Overall, the measure feels more symbolic than seismic for now, but it sets a precedent that could reshape the prime market over time, particularly with the tax rising with CPI inflation each year. In already fragile markets, the surcharge is likely to exert downward pressure on prices and transactions around the £2 million mark, as buyers and sellers adjust to a new layer of cost and complexity.

Increased taxes on rental income

From April 2027, the tax rate on income from property, savings, and dividends will increase by 2%. This includes income from rent. The new rates for basic, higher and additional rate taxpayers in England, Wales and Northern Ireland will be - 22%, 42%, and 47% respectively. The changes are expected to raise £0.5bn in tax receipts by 2028-29.

Currently, landlords receive a 20% credit equivalent to offsetting their mortgage interest against basic rates of income tax. This will also increase by 2%, meaning the average landlord’s tax bill would likely only rise by £70 a year. While profit from homes held in a company is not liable for income tax, an increase in dividend tax rates may make it more expensive for landlords to take money out of a company.

The OBR report acknowledges the risk that the increased cost will be passed on to rents, particularly if this prompts more landlords to sell up, stating: “This risks a steady long-term rise in rents if demand outstrips supply.”

In the short term, this change is expected to actually reduce the Treasury tax take over the next two years due to the behavioural response. However, they think the cost will be offset by higher stamp duty receipts as more landlords incorporate, alongside rising property prices (roughly 2.5% each year).

The ‘successive eroding of landlord returns’, as the OBR puts it, will provide an additional incentive to the 80% of landlords with homes in their own names either to sell up or move homes into a company structure. Recent months have seen the number of new buy-to-let companies surpass 6,000, meaning a record 70,000 companies are likely to be set up this year as investors seek ways to shelter from a rising tax burden.

OBR Forecasts

The OBR has revised its economic forecasts to reflect a weaker medium-term outlook. GDP growth for 2025 is now expected at 1.5%, slightly higher than before, but growth from 2026 onwards has been downgraded to around 1.4–1.5% per year, largely due to slower productivity gains.

Public sector net debt is forecast to rise from 95% of GDP in 2025–26 to a peak of 97% in 2028–29, before easing slightly to 96.1% by 2030–31, leaving the UK with one of the highest debt ratios among advanced economies. Borrowing falls from 4.5% of GDP in 2025–26 to 1.9% by 2030–31, but debt interest costs remain elevated.

The labour market outlook has softened - unemployment is expected to hover around 5% until 2027, before gradually declining to 4.1%, while participation continues to edge down.

In housing, residential property transactions are forecast to recover only modestly - from just under 1.1 million in 2024 to around 1.3 million by 2029, which is 155,000 fewer per year than previously expected, reflecting higher mortgage rates, stamp duty, and demographic factors. House prices are projected to rise from £260,000 in 2024 to just under £305,000 by 2030, with annual growth slowing to about 2.5% from 2026 onwards; tax changes from 2027 are expected to trim growth slightly. Overall, the housing market outlook remains subdued, with fragile prime segments facing additional headwinds from new property taxes.