Sienna West

Senior Journalist, The British Wire

London's property market is facing a new reality. From today, tighter capital gains tax (CGT) rules have come into force, sending shockwaves through the capital's housing sector. Industry experts warn of falling transaction volumes and a potential price correction in the coming months.

The changes, announced in the Chancellor's Autumn Statement, reduce the annual CGT exemption from £12,300 to £6,000 for the 2023-24 tax year. For higher-rate taxpayers, CGT on property sales now stands at 28%, up from 24% for basic-rate payers. The move is expected to raise an additional £1.5 billion for the Treasury by 2027.

But at what cost? Sarah Thompson, a partner at London estate agents Knight Frank, says the impact is already being felt. "We've seen a flurry of activity in the final quarter of last year as investors rushed to sell before the changes. Now, the market has gone quiet. Sellers are holding off, hoping for a reversal, while buyers are demanding discounts to offset their tax liabilities."

Data from Rightmove shows that new listings in London fell by 12% in January compared to the same period last year. The number of sales agreed dropped by 8%. "This is just the beginning," warns Tom Bill, head of UK residential research at Knight Frank. "Investor appetite will be severely dented. We could see a 5-10% drop in prime central London prices over the next 12 months."

The new rules specifically target second homes and buy-to-let properties. The 28% rate applies to gains from residential property that is not the seller's main home. This is a direct hit on the city's army of small-scale landlords. According to Hamptons International, 63% of London landlords are considering selling at least one property in 2024, up from 48% last year.

"I'm selling up," says James Carter, a landlord with four flats in Hackney. "The tax changes mean it's no longer worth it. I've been a landlord for 15 years, but the costs keep rising. With higher stamp duty, stricter regulations, and now this, I'm out."

Economists are divided on the wider impact. Some argue the tax hike will cool an overheated market, making housing more affordable for first-time buyers. "The measures will discourage speculative buying and free up properties for owner-occupiers," says Paul Johnson, director of the Institute for Fiscal Studies. But critics counter that reduced investor activity could shrink rental supply, pushing rents even higher.

Already, London rents have risen by 12% year-on-year, according to HomeLet. The National Housing Federation warns that 1 in 4 private renters in London now spend over half their income on housing. "The new CGT rules could exacerbate this crisis," says Kate Henderson, the federation's chief executive. "If landlords sell up, tenants will be left with fewer choices and higher costs."

The Bank of England is watching closely. In a recent speech, Governor Andrew Bailey expressed concern about falling housing transactions. "A sharp drop in market activity could affect consumer confidence and spending," he said. The bank's Financial Policy Committee has flagged housing market vulnerabilities in its latest report.

For now, the mood in London's estate agencies is somber. "We're advising clients to be realistic about pricing," says Thompson. "Gone are the days of quick profits. Sellers need to factor in the tax hit. This is a buyers' market now."

As the new rules take hold, the capital awaits the true test. Will the market adjust, or will the tax changes trigger a deeper downturn? One thing is clear: London's housing market is entering uncharted territory.