Three months of Budget rumours have stalled activity in parts of the UK economy. But at the top of the property market, some have accelerated their plans before possible new measures take effect.

By the time the Budget takes place on 26 November, three months will have passed since the first ‘mansion tax’ headlines appeared this summer.

For more than a quarter of the year, some sections of the property market have effectively been operating in the dark, reflected in last week’s RICS survey.

It’s the same story across the wider economy, with unemployment hitting a four year high and GDP growth approaching zero a last week. No wonder Chancellor Rachel Reeves wants to increase her fiscal headroom and avoid a third successive year of prolonged speculation in 2027.

However, while some buyers and sellers have sat on their hands, others have done the opposite.

UK exchanges fell 10% in the three months to October compared to the previous year, Knight Frank data shows.

At the top-end of the market, where the tax speculation has been more intense, activity has risen. UK exchanges above £5 million increased by 14% over the same period.

“Some buyers and sellers have accelerated their plans and are only too happy to exchange before the Budget,” said Ed Rook, head of the Country Department at Knight Frank. “If you are committed to buying a property, it’s a sensible thing to do. The uncertainty will have lifted after the Budget, but you are unlikely to be in a better position from a tax perspective.”

Sales have also taken place as buyers take advantage of price declines in recent years, particularly in prime central London.

Council tax in focus

As the Budget approaches, property tax speculation has coalesced around council tax reform, through the creation new bands for higher-value properties or increasing rates in the current top G and H bands.

Meanwhile, talk of a full-blown mansion tax, based on the percentage of a property’s value, has faded. Possibly because it would involve a complex and legally contestable valuation exercise.

However, it’s difficult to second-guess a government when it’s backed into a corner, as demonstrated by its eleventh-hour rethink on raising income tax last week.

That said, more property taxes aren’t necessarily the logical outcome of its U-turn.

“I don’t think the shifting sands on income tax reveals any different plan on property taxes,” said James Nation, managing director at political consultancy Forefront Advisers and a former special advisor to Rishi Sunak when he was Chancellor. “We are still likely to see a higher value property tax in some from to help deal with what remains a large fiscal consolidation for Reeves, probably based on council tax in the first instance.”

Power Struggles

Internal power struggles over the Labour leadership mean MPs are now calling the shots, which is not great news for the other two.

Gilt yields opened higher following the income tax retreat, signalling lower market confidence in the government’s plan to plug the fiscal gap. A perception that MPs can veto government decisions must also have unnerved investors.

The other plausible property-specific measure that could appear in the Budget is levying National Insurance (NI) on rental income, despite the government’s desire to contain inflation.

However, even if property-related interventions are limited to council tax and NI, buyer and tenant demand could still be dented by the wider package of tax changes under discussion.

Speculation has ebbed and flowed in recent weeks, presumably as certain plans have not survived contact with reality, but the spotlight has previously been on pension tax relief, capital gains tax loopholes, inheritance tax and Limited Liability Partnerships. Freezing or lowering income tax thresholds would also curb spending power.

Glimmer of good news on borrowing costs

The poor labour market and GDP numbers at least meant there was better news on borrowing costs last week.

Irrespective of the upwards pressure on gilt yields following the change of plan on income tax, it meant financial markets increased their bets on a December rate cut. That said, Michael Brown, a research analyst at financial broker Pepperstone, warned about the longer-term outlook.

“I wonder whether market participants might need to start thinking ahead a little more, as opposed to simply hanging on backwards-looking, and at this point rather unreliable, labour market statistics,” he said.

He warned that a Budget that failed to set out a plan for cutting costs could unsettle markets. If Reeves was replaced, the outlook for borrowing costs could also deteriorate, he added.

“A cursory glance back to July, when Reeves’s tears in the Commons sparked speculation that she may imminently be replaced, and the subsequent gilt sell-off, gives a sample of how her possible ouster could pan out,” he said.

Irrespective of what the Chancellor delivers on 26 November, last week’s chaos must have weakened the position of those inside Number 11 and 10 Downing Street.

Tom Bill is head of residential research at Knight Frank