The Impact of Fiscal Policy on the Residential Market
In the South West, the residential market is facing growing pressures due to recent changes in fiscal policy. Over the past 12 months, the government has announced reforms to several property-related taxes, including Stamp Duty Land Tax (SDLT), Capital Gains Tax (CGT), and Council Tax, whilst other taxes, such as Inheritance Tax (IHT), remain unchanged but are exerting greater influence due to frozen thresholds. These measures are reshaping the dynamics of the residential market, particularly for second home buyers and investors.
Stamp Duty Land Tax
From 1 April 2025, the Government implemented changes to SDLT with the aim of rebalancing the housing market and dis-incentivising property accumulation by investors.
Key changes include:
- Standard buyers: The nil-rate band has been reduced from £250,000 to £125,000, meaning any properties valued above £125,000 will incur SDLT.
- First time buyers: The relief threshold has reduced from £425,000 to £300,000, and the relief cap has reduced from £625,000 to £300,000.
- Additional properties: A new 7% SDLT has been introduced for the portion of property value between £125,001 to £250,000. The nil rate threshold has decreased to £125,000, meaning all buyers of additional properties will pay at least 5% on the first £125,000 of the purchase price. Higher bands (10%, 15%, and 17%) remain unchanged for portions of the purchase price above £250,000.
These reforms are expected to have significant implications for the investment and buy-to-let markets, as rising acquisition costs reduce profit margins.
Capital Gains Tax
As part of the Financial Bill 2024-25, new legislation has introduced the following changes to CGT:
- Basic rate taxpayers: The CGT rate on non-residential gains will increase from 10% to 18%.
- Higher rate taxpayers: The CGT rate on non-residential gains will increase from 20% to 24%.
- Residential property: CGT rates remain unchanged – 18% for basic rate and 24% for higher rate taxpayers.
- Annual Exempt Amount (AEA): The tax-free allowance remains at £3,000 for individuals, following a previous reduction from £6,000.
- Business Asset Disposal Relief (BADR) and Investors’ Relief: The relief rate increased from 10% to 14% for disposals made on or after 6 April 2025, and to 18% for disposals made from 6 April 2026.
These changes will result in increased tax liabilities, prompting many to consider selling assets before the new rates take effect. This may also impact the purchase of investment properties, such as development projects intended for renovation and resale. Properties requiring work may see decreased demand due to the burden of CGT associated with the sale and the money generated.
The increased tax burden may deter investors from entering the property market or expanding their portfolios, potentially leading to a slowdown in property transactions and affecting property prices, particularly in the buy-to-let sector. On the other hand, investors may choose to retain their current assets to defer the higher CGT rates, which could result in a more stable rental market with fewer property disposals.
Council Tax
From 1 April 2025, numerous councils across the South West implemented significant changes to Council Tax, particularly targeting second homes, in an effort to address housing shortages and improve affordability.
Councils including Cornwall, South Hams, Torridge, Exeter, North Devon, Mid Devon, East Devon, Somerset, Bath and North East Somerset, and North Somerset, implemented a 100% Council Tax premium on second homes, effectively doubling the tax liability for properties not used as a main residence. In addition, several councils approved general Council Tax increases, such as Cornwall (4.99%), Somerset (7.49%), and Torridge (2.99%), with some allocations directed towards adult social care.
These higher Council Tax rates are expected to increase the financial burden for many homeowners, potentially impacting affordability and reducing demand in certain locations. Buyers may increasingly look to less expensive regions to mitigate these costs.
Whilst the second home premium aims to improve housing availability for full-time residents, it may reduce the appeal of second home ownership in the South West by discouraging future purchases and prompting some owners to sell. Consequently, demand may decline, and supply may increase in popular second home areas, particularly at the high end, where the financial impact is more significant and investor margins are already under pressure from other fiscal policy changes.
Inheritance Tax
No recent major structural changes to IHT have occurred, however, thresholds remain frozen, increasing the effective tax burden on high-value estates. The standard nil-rate band remains at £325,000, and the residence nil-rate band at £175,000 – both unchanged since 2020 and now fixed until at least April 2028. For estates exceeding £2 million, the residence nil-rate band continues to taper, impacting the relief available to the high-end residential market. In high-end residential markets, particularly in the South West, the frozen thresholds are expected to bring more estates into scope over time, prompting increased focus on succession planning and lifetime transfers.
Conclusions
The recent fiscal policy changes are reshaping the residential market across the South West. These reforms increase the cost and complexity of acquiring, holding and transferring property, placing significant pressure on homeowners, investors, and second-home buyers. While some measures aim to improve housing affordability and availability for full time residents, the combined impact may lead to reduced demand, increased supply and evolving strategies in certain areas. As these policies continue to change, understanding their implications will be essential for assessing property values and making informed investment decisions.
At Vickery Holman, we understand the importance of staying informed about the ongoing fiscal changes and their impact on the residential market. Our expertise enables us to provide valuation advice that reflects evolving tax policies and market conditions.
