The BloomSmith team analyses whether changes in business rates will stimulate property activity  

October brought the long-awaited first budget from the new Labour government.

Alongside a flurry of tax rises designed to plug a “£40 billion black hole” in the treasury’s coffers were significant reforms to how business rates will be levied.

These changes will have wide repercussions for the commercial property sector, this article explores what they could mean for long-term property prices and activity.

What are the new reforms?

From April 2026, businesses within the retail, hospitality and leisure (RHL) sectors will see the benefit of a permanent reduction in the rates they pay on the property they occupy.

Rachel Reeves has promised to “introduce two permanently lower tax rates for retail, hospitality and leisure properties which make up the backbone of high streets across the country”, however the specifics of these new rates have yet to be formalised.

To offset these reduced rates for “RHL” businesses, a new, higher multiplier will be applied to high-value properties with a rentable value of over £500,000.

The chancellor has also extended rates relief across 2025 and 2026, until the new rates kick in.

This rate relief will sit at 40%, with a cap of £110,000 per business – a sizable drop from the 75% rate currently in place.

Find more in the government’s press release.

Why have they been implemented?

The preferential terms for RHL businesses have been designed to try and create long-term relief for sectors that are both at the core of the faltering British high street and create substantial employment opportunities.

It is also, in part, a bid to address the competitive advantage that online retailers hold over their physical counterparts.

Business rates relief, initially put in place because of the Covid-19 pandemic, was supposed to end in 2025, and the new 40% relief rate has been designed to soften the landing in the period that precedes the permanent rate changes.

By raising the rates against high-value properties, the government has sought to implement a taxation policy that it considers more equitable, with wealthier businesses bearing more of the brunt of the tax load and offsetting the shortfall.

How will this affect businesses?

A short-term reduction in rates relief could prove a real belt-tightener for many businesses, especially when coupled with increased employer NICs contributions and a higher minimum wage – possibly flying in the face of the government’s goal of turbocharging economic growth.

For instance, analysis from Altus Group indicates that the drop to 40% could impact 250,000 businesses in England with the average business rates bill for restaurants and pubs more than doubling.

Despite this, their hope is that the new rates will bring long-term benefit for businesses within these crucial sectors.

The changes in how rates are levied could prove to be painful for owners of large properties such as retail warehouses or shopping centres.

The government’s argument is that the owners of high value properties are better placed to swallow these costs, and that this redistribution is a “championing” of small businesses.

Ultimately, with the specific rates not yet announced either, the actual impact on businesses remains to be seen.

How could they impact commercial property prices and activity?

Changes in business rates for RHL properties could see the market adjust property valuations as reduced operating costs lead to a greater appetite for property investment opportunities.

Despite this, such benefits could be offset in the short-term by businesses holding-off on investment decisions while they wait for the new rates to take hold or wish to see the long-term impact of the policy change.

This could be especially apparent if the short-term burden of NICs contributions, wage growth and reduced relief starts to pinch.

In the medium-to-long-term, we remain hopeful that reduced operating costs will lead to increased profitability and a growing appetite for commercial property within these sectors – especially if the reduced rates can encourage new entries to the market.

However, it is important to remain grounded and recognise that any reduction in operating costs could always be wiped out by any number of unforeseen factors.

The BloomSmith house view is that the proposed tax hike on high-end commercial real estate could see many businesses shy away from ambitious investment projects and it will likely lead to a rebalancing of values in sectors such as retail warehousing.

The efficacy of any changes will be followed closely, but we believe that a bold attempt to address the unfair competitive disadvantage that this outdated taxation causes for brick-and-mortar businesses is necessary for enterprises to flourish.