The Labour Government has already warned that its first fiscal budget will be painful. With an estimated £22 billion black hole to fill, it’s likely that taxes will increase and public spending will be cut.
A number of announcements have already been made on the Government’s plans for the property and construction sector. It is therefore hoped that the Budget won’t include too many nasty surprises, although many fear the worst.
Private rental sector
The Government has already announced that it hopes a ban on no fault evictions will be in place by summer 2025. This measure comes with a number of other plans to strengthen the rights of tenants, including:
- Increased powers to challenge unreasonable rent increases
• Giving tenants the right to request pets
• Requirements for landlords to fix problems such as mould
• Ending bans on tenants on benefits
• Requiring landlords to publish an asking rent in advance to end bidding wars
In anticipation of these measures, many landlords are already selling properties. In London it has been reported that the number of buy to let properties for sale has reached a 10-year high. Capital Gains Tax (CGT) rates were reduced from 28% to 24% by the previous Government which means that landlords are currently being taxed at more favourable rates when they sell. Whilst an increase in CGT rates is expected to be announced in the Budget, it is hoped that this won’t come into force until the start of the new tax year to allow landlords time to assess their positions and to offload property if they want. Increasing CGT rates with immediate effect on Budget Day may cause landlords to hold on to properties as they won’t want to suffer a higher tax burden.
Housing
In July, Angela Rayner announced a mandatory housing target of 370,000 new homes per year to “Get Britain Building”. Whilst this is good news for developers and builders, estate agent membership group Propertymark has pointed out that this means building just over 1,150 new homes every single working day for the next 5 years to reach the 1.5m new homes target in this Parliament.
In order to achieve this ambitious target, it is hoped the Government will do something to tackle labour shortages and a growing skills gap in the construction industry. Offering incentives to businesses that offer construction sector apprenticeships would help get more young people into the industry, and making it easier and cheaper for construction companies to recruit from overseas would help to mitigate domestic labour shortages.
Public infrastructure
A number of high-profile infrastructure projects have already been paused or scrapped in an effort to get public spending under control. These projects are generally ones that significantly contribute to carbon emissions or have other adverse environmental impacts, and it appears the government wants to realign projects to long-term environmental sustainability, with a particular emphasis on producing clean energy.
Investing in green and sustainable projects is a great cause, but with limited public finances the key to achieving infrastructure targets will be through attracting private investment. It is hoped that the Government’s need to increase tax revenues will be balanced with recognising that the tax system needs to be competitive. Increasing companies’ tax burdens too much will drive away investment which will cause economic growth to stagnate.
Rush to sell holiday homes and buy-to-lets before Autumn Budget
The number of properties up for sale has risen by 12% ahead of the Autumn Budget on October 30, Zoopla’s September House price Index has found.
A third of these homes are ‘chain free’, including investment properties, while 13% were previously rented out.
Buyer demand is up 26% year-on-year, which is working to keep house prices at a steady level.
Sarah Coles, head of personal finance, Hargreaves Lansdown, said “owners are falling over themselves in a rush to shift holiday homes and buy-to-let investment properties. They’re panicking that changes that might come through in the Budget could saddle them with a huge tax bill on their gains, making property investments even less attractive from a tax perspective.
Fortunately for sellers, this wave of property listings isn’t forcing prices down, because demand from buyers is on the up too. It’s helping to protect sellers from yet another disappointment in their property investment journey. However, it’s still a buyer’s market, so they can’t afford to overprice their property – especially if they’re after a quick sale ahead of any potential tax changes.”
How much extra rent do you need to offset Labour’s proposed CGT grab?
Many landlords in the past used to budget for a capital growth strategy with their investments guided by a 5% annual gross yield on rental income and 5% average annual return on capital growth.
The rental yield just covered the running costs of maintenance, management and finance though recently higher rents were necessary to cover the current high finance costs. 5% capital growth seemed reasonable based on a doubling of house prices every 14-15 years.
So, if Labour increases the capital gain tax top rate from our budgeted 28% (24% current) up to 40%, then how much would landlords need to increase the rent just to keep their budget goals?
Here are some calculations:
For simple terms I’ll use a £250,000 property.
Capital growth 5% growth per year £12,500 in one year
Historic 28% CGT rate £3,500 / proposed 40% tax due £5,000- extra tax to pay £1,500 (£125pm)
This year’s 24% CGT rate £3,000 / proposed 40% tax £5,000 – extra tax to pay £2,000 (£166.66pm)
Rental Yield
5% yield means rent of £12,500 (£1,041.66 per month)
To offset the extra tax due on capital gain to keep to the budget (based on old CGT rate 28%) we need £125pm + income tax due on this extra profit income.
Therefore a 20% taxpayer would need to increase monthly rent by £156.25 from £1,041.44 to £1,198
And a 40% taxpayer would need to increase monthly rent by £208.34 from £1,041.44 to £1,250.
Therefore, just to keep the current projected income stream as planned, then the landlord would need to increase rents by:-
15% more rent for a 20% landlord taxpayer or 20% more rent for a 40% landlord taxpayer.
NB If you budgeted for this current year’s 24% CGT rate, then 20% landlord taxpayers need an extra 20% rent income, and 40% landlord taxpayers need an extra 26.6% extra rent to offset the extra CGT.
This, of course, does not take into account all the past historic years of capital gain that will be overtaxed (stolen) off us for keeping a low rent/capital growth strategy.
The calculations are meant as a guide only.
UK public opposes inheritance tax change
There’s strong opposition (69% of the public) to increasing the current 40% rate at which inheritance tax is levied, a YouGov poll commissioned by law firm Kingsley Napley shows
Indeed, the majority of the British public (64%) favour raising the £325,000 threshold at which the tax must be paid.
The Labour Party is expected to raise taxes to plug the so-called ‘£22 billion black hole’ in public finances, while Chancellor Rachel Reeves has refused to rule out changes to inheritance tax.
James Ward, partner and head of private client at Kingsley Napley, said “speculation is rife that Rachel Reeves will introduce changes to the IHT regime on 30th October. However, I think the steps she will take will be more detailed than just simply altering the nil rate band or the tax levy rate. She could look at removing the CGT uplift on death, for example, where there is currently a zero charge to Inheritance Tax, to remove the excess income exemption or to bring pension pots into estates for IHT purposes. She may target AIM shares and some agricultural reliefs. There have also been reports of her looking to remove the residence nil rate band exemption.
Although an increase in VAT or income tax would do far more to help plug the ‘black hole’, her manifesto has prevented her going down that route, so curbing exemptions around Inheritance Tax is one of the few options open to her. If she does incorporate suggestions such as these, she could yield up to £2bn in revenue according to IFS** estimates. Whilst increasing IHT overall remains unpopular across all voters and age groups, she could potentially justify changes that target wealth passing between generations on fairness grounds.
Of course, the reality is that IHT is paid by less than 10% of UK estates, mostly in London and the South-East, delivering a total £6bn in revenues. However, an increase of £2bn by selective measures is not to be sneezed at. Those who may be impacted should act fast to take prudent estate planning steps ahead of 30th October.”