Business rates and help for home buyers
If the government cuts business rates, tenants feel the benefit first; their tax bill goes down, meaning their operating costs fall. For existing tenants with a fixed rent, that’s an immediate saving. For new tenants negotiating a lease, the reduction might be partly offset by higher rent expectations.
Over time, market forces can shift the benefit: When property taxes fall, the total occupancy cost (rent + rates) that businesses are willing to pay often stays similar.
In a strong rental market of high demand and low vacancy, landlords can capture some of the benefit by raising rents. In a weak market, with high vacancy and low demand), tenants keep most of the benefit, since landlords cannot push rents up.
Economists call this the tax incidence; the ultimate burden or benefit depends on which side (tenant or landlord) is more price-sensitive or has less bargaining power.
When the UK government introduced temporary business rate relief for small retail and hospitality premises during COVID, the tenants benefited directly because leases were already in place. But over longer periods, especially in prime areas like central London, landlords often recaptured a chunk of those benefits through higher rents once leases were renegotiated.
So, cutting UK business rates helps tenants first, but over time landlords may capture much of the benefit, depending on market conditions and lease structures. Abolishing business rates will ultimately lead to landlords raising rents when market conditions allow. It is not a panacea for business tenants as is often claimed.
Similarly, it is unlikely that a £5,000 tax relief for first time home buyers will benefit them unless the supply of housing increases.
If there is no increase in the supply of homes, a £5,000 tax relief or subsidy for first-time buyers will mostly push up house prices, not make housing more affordable in the long run.
Giving buyers £5,000 effectively boosts their purchasing power; they can bid more for the same properties. Housing supply is fixed in the short run because in the UK, new homes take years to build due to planning constraints and developer timelines.
When demand rises but supply does not, prices go up. This is classic demand-pull inflation in the housing market. Sellers capture most of the benefit because they can raise asking prices knowing buyers have extra cash.
First-time buyers see little net benefit: They may pay roughly £5,000 more, and possibly take on more mortgage debt. Existing homeowners gain indirectly, as overall market valuations rise slightly.
Economists call this the ‘capitalization effect’ as subsidies are absorbed into asset prices, and there’s empirical evidence showing this.
Studies by the National Audit Office and LSE researchers found that Help to Buy (2013-2023) increased new-build prices by 5-8%, largely offsetting the benefit for buyers. When the government temporarily cut stamp duty (2020-2021), average UK house prices jumped sharply, as buyers used the savings to bid higher.
In both cases, limited supply meant the policy fed directly into higher prices rather than improved affordability. Without an increase in housing supply, a £5,000 tax relief for first-time buyers is likely to raise house prices rather than improve affordability, and most of the benefit would flow to sellers, not buyers.
This means that two flagship policies of abolishing business rates and giving tax relief to fist-time buyers are unlikely to benefit those they are purported to help.
Madsen Pirie