BLOG: The Chancellor is locked on the horns of a dilemma

The Autumn Budget is beginning to look less a Budget and more of an underwater ‘Houdini tangle’ with the key to the lock lost.

The Chancellor must raise money, restrain spending, satisfy the fiscal rules, reassure the Gilt market, encourage growth, keep the Manifesto promises, appease the back benchers, while at the same time create growth that produces some tax revenues and shrinks debt.

What could possibly go wrong and where is David Copperfield when you need him?

The problem?  

His predecessor, Rachel Reeves, managed to asphyxiate the economy in the last two Budgets by raising taxation by more than £66billion (across the five-year forecast) and borrowing by £185billion, and this legacy of grand ineptitude is the poisoned chalice that the present Chancellor must bear.

He doesn’t have an unlimited overdraft, and his paymaster is not who you think it is, the Prime Minister, but more the Gilt market, which has no vote in Parliament.

Nevertheless, its opinion must be respected, otherwise Britain’s substantial service of its debt (of almost 100% of GDP) will go off the Richter Scale.

Property taxes

Property is the Treasury’s perennial cash machine because it is visible, immobile and in the eyes of the tax man, conspicuously difficult to hide.

Stamp Duty is an obvious example. It raises substantial sums of around £12billion a year, but its downside is that it taxes the transaction, rather than the ownership of the asset, and this distinction matters.

A tax that makes someone think twice about buying or selling, is not necessarily economically neutral.”

A tax that makes someone think twice about buying or selling, is not necessarily economically neutral.

It can ‘gum up’ the housing market by locking up potential capital, which would otherwise flow into the economy through taxation, retail spending and stimulate growth.

This is why the debate about replacing transactional taxes, with some form of recurring property taxation, is becoming more enticing (and real) than any small adjustment to the Stamp Duty rates.

Already the Government is moving towards a new tax on higher value property, with the Council Tax surcharge due to apply to qualifying properties worth £2million or more, from April 2028.

The temptation will inevitably be to push the threshold downwards towards £1.5million, in order to squeeze more revenue out of less expensive homes, below this limit.

It is interesting that this is being called a ‘Mansion Tax’, – a deliberately emotive ‘label’ that will certainly appeal to the left of the Labour Party.

If, on the other hand, they were more politically moderate, it would of course be called ‘Home Tax’. Indeed, you would be lucky to acquire a two-storey terraced house for this money, in the less salubrious environs of Chelsea.

In fact, I’m sorry to admit that for £1.5million to £2million you would be lucky to get a pied-a-terre in London today.

Both Reform and the Tories have brazenly announced that they will abandon Stamp Duty if they get half a grasp at the ‘tiller of power’, at the next Election.

Were the Chancellor ever to consider this reform, the Budget coffers would need a lot of replenishing with recurring property taxation to replace the £12billion or so that Stamp Duty usually generates.

If this was to be the case, initially there will be a flood of transactions from buyers in all price ranges, trying to benefit from this unexpected change, and no doubt residential values would momentarily rise sharply, until the market fully absorbs the implications of a painful, annual Mansion Tax, to replace the lost revenue.

I get the distinct feeling from coded messages sent out by No 10 and No 11, that such a major reform will probably not be considered, as they would prefer that this Autumn Budget be a less momentous event, as it has been in the past, and instead they would like the financial analysts to focus on the Spending Review, sometime next year.

My instincts are telling me that they are hopeful that there will be a resolution to the Iran war by then, which will take the pressure off inflation, interest rates and debt service.

Property ladder

Don’t forget, the first-time buyer trying to get onto the property ladder, wish for a collapse in the residential property market, not a further rise.

Angela Rayner is trying to rejuvenate the Help-to-Buy Government initiative.”

While on this subject, it is interesting to note that the Housing Secretary, Angela Rayner, is trying to rejuvenate the Help-to-Buy government initiative, whereby the first-time buyer pays a 2.5% deposit and the Government provides a 25% equity loan, initially interest free. The mortgage covers the rest.

The problem is that usually, a scheme like this is limited in scope and I’m afraid to say, allows some gluttonous house builders to over-charge these naïve buyers for their unsold properties, leaving them with negative equity if property values don’t grow. It is the equivalent of ‘putting the fox in charge of the hen house’, but there it is.

Alternatives?

Capital Gains Tax (CGT) is more interesting because it is an ‘elective tax’ in the broadest economic sense.

You can often decide whether to realise a gain or not, as the case may be. You can delay a transaction or retain an asset. You can also restructure the ownership and for internationally mobile people, they could move to warmer and more accommodating fiscal climes, elsewhere in the world, without paying this tax.

An inconvenient detail is that there is an annual exemption for CGT and where there is a Capital loss, this has to be taken into account, thereby reducing the revenue to The Exchequer.

The Institute of Financial Studies notes that HMRC’s estimate suggests that a 10% increase in higher CGT rates could reduce the revenue, in the short term, by around £2billion. I did say reduce the revenue, didn’t I? And ‘therein lies the rub’. 

Class war tactics

The burning question to the Government must be, is taxation a revenue raising device or is it another spiteful symbol of class war tactics?  This will be the litmus test that we will all bear witness to, when the full extent of the Budget is known.

If Healey reforms the Triple Lock pension arrangements in order to fund free, elderly social care, they are going to need some sort of counter balancing tax hike, which will appear to be ‘kicking the rich’ and a rise in CGT would be a perfect candidate, even if it doesn’t raise much money.

Remaining?

What is left is planning reform, boosting house and infrastructure building. Despite all the protestations of Angela Rayner, she claims that her planning reforms are going to open the sluice gates of housing development across Britain.

Already there is tacit acceptance by her and the Government that the well-chronicled and much vaunted target of 1.5million homes to be built across the electoral term, is now woefully overstated. It has been recently quoted that planning approvals for new homes have plunged to a 13 year low in a blow to Labour’s promise to oversee a house building revolution.

The truth is they are fortunate to get within 50% of this target, and the gap is widening as we speak, because of the slowdown in the house building sector, as evidenced by recent trading results of the UK-wide developers.

Whether the Government likes to hear it or not, the private sector produces 71% of new build completions with housing associations and local authorities building the rest.

The building sector is mired with massive increases in building material costs, shortage of manual and skilled labour, rising borrowing rates and…negative growth in values.”

The building sector is mired with massive increases in building material costs, shortage of manual and skilled labour, rising borrowing rates and as if this were not enough, negative growth in values.

Development sites are struggling to generate interest of boutique and nationwide developers in this challenging climate, unless of course, there is a collapse in land values to compensate, which ain’t happening – at least yet. But this could still come.

Property income tax

Meanwhile, landlords will see, from April 2027 and the Budget of 2025, changes to income tax rates for property income to 22%, 42% and 47%, compared with the ordinary Income Tax rates.

It means that landlords face a further tax squeeze even before the October Budget offerings and since there is every likelihood that the Mansion Tax threshold will be lowered, this will be a further burden to Buy-to-Let landlords who will face this liability and not the tenants.

This, together with increasingly restrictive regulatory and tax pressures on landlords, will greatly exacerbate this exodus.

The question now must be, if you make Buy-to-Let investments even less attractive than they have been in the past, provoking more landlords to sell up, where then does the replacement rental stock come from?

There are many reports that 28% more Buy-to-Let properties were put up for sale to March 2026, which is significantly reducing the supply of available properties to rent, pushing up prices and further endangering the vulnerable renters.   

Inheritance tax (IHT)

There is talk among the ‘chattering classes’ that in the Budget, IHT will either be raised, or the tax-free element reduced.

If this takes place, it is by any measure another tax that would be highly unfortunate and suppress the ‘feel good factor’ even further.

The Chancellor enters the fray ‘locked on the horns of a dilemma.’

He is between Scylla and Charybdis – the Homeric image of a sailor who cannot avoid one danger, without heading towards another.

I’m bound to say, that our Prime Minister did cut an unedifying spectacle when he met President Trump at the United Nations gatherings recently.

Perhaps the low standing of Britain in the world could not be further evidenced by the fact that his speech was third from last in the running order – of 23 speakers -, and his graveyard slot of midnight tells a very poignant story when the auditorium was practically empty.

The post BLOG: The Chancellor is locked on the horns of a dilemma appeared first on The Negotiator.