Conservatives and Labour draw battle lines over property tax – Mortgage Strategy

The Conservatives’ pledge to scrap the mansion tax highlights a growing ideological divide with Labour over home ownership and tax, according to Knight Frank.

This week the Conservative Party pledged to abolish the proposed mansion tax and inheritance tax on primary residences if re-elected.

The proposals, announced by Conservative leader Kemi Badenoch at the party’s conference in Birmingham, underline the Tories’ intention to make lower taxes and home ownership central to their economic agenda, according to Tom Bill, head of UK residential research at Knight Frank.

Labour, meanwhile, is pursuing a different approach, placing greater emphasis on the state’s role in driving growth and raising revenue to rebuild public finances.

Bill said the Conservatives were making the case for lower taxes to boost the economy, while Labour was more focused on government intervention and the need to increase taxation to create additional financial headroom.

The proposed council tax surcharge on properties worth £2m or more, commonly referred to as the mansion tax, has become a clear point of distinction between the parties, Bill said.

The Conservatives have also pledged to abolish inheritance tax on primary residences, although the proposal has attracted criticism from Paul Johnson, former director of the Institute for Fiscal Studies, who said it could discourage homeowners from downsizing.

Bill noted that Labour’s approach to taxing expensive homes would be familiar to those who have followed British politics since the global financial crisis of 2007-08.

The Conservatives’ explicitly pro-aspiration message, centred on home ownership, represents a different tack, drawing comparisons with the political approach associated with Margaret Thatcher.

Despite current polls suggesting that the Tories will not win the next election, Bill said the ideological divide between the parties was becoming clearer.

Reform UK has also expressed opposition to new taxes, although it has been less categorical about whether it would abolish the proposed mansion tax.

A Reform spokesman told Knight Frank: “Reform is against new taxes in principle, and definitely against new taxes imposed without a mandate. As far as we are aware, a mansion tax was not in Labour’s 2024 manifesto.”

The political debate is unfolding against a challenging backdrop for the housing market, with rising mortgage costs adding to uncertainty for buyers and homeowners.

The average five-year fixed mortgage rate reached 6% in October, its highest level since September 2023, according to Moneyfacts, following an increase in inflation expectations linked to the conflict in the Middle East.

Bank of England figures show mortgage approvals were 14% below their five-year average in August, while property transactions were flat against the same benchmark, according to HMRC.

Bill said the full impact of higher borrowing costs was likely to emerge gradually because mortgage offers typically last up to six months. With offers secured before the conflict began now having expired, more buyers are facing higher rates, raising the prospect of weaker transaction levels towards the end of the year.

Recent market indicators point to slowing momentum. The Royal Institution of Chartered Surveyors reported that the housing market was losing pace, while Lloyds recorded no annual house price growth in the year to September.

The uncertainty surrounding interest rates and the forthcoming Budget is also weighing on higher-value properties outside London.

In the country market, which covers urban and rural homes worth more than £750,000, average prices fell by 4.2% in the year to September, compared with a 5% decline in the year to June, according to Knight Frank figures.

The number of exchanges in the sector was 2% lower in the third quarter than a year earlier, while offers fell by 10%.

James Cleland, head of country sales at Knight Frank, said demand remained selective as buyers and sellers waited for greater clarity on taxation and borrowing costs.

“While well-priced properties are generating good interest, overall sentiment is brittle due to the uncertainty of what will be in the Burnham administration’s first Budget, on top of rising mortgage rates,” Cleland said.

“With concern about which taxes may or may not rise in the Budget later this month, buyers and sellers are struggling to find a steady footing.”