Budget 2021: What it could mean for the Property Sector
The last time Rishi Sunak stood on the steps of Downing Street to deliver the first budget of the new conservative government in March of last year, little did he know it will be followed by a complete shutdown of the economy, a recession like no other and economy would contract by 20.2% in the second quarter just three weeks later.
A lot has happened since the government has taken on record levels of debt not seen since the 1960s. For the first time, the debt to GDP ratio will exceed 100%, meaning we owe more debt than we bring in through tax receipts. Tax receipt fell by almost 50% last year, according to the ONS. Essentially meaning we now owe more in debt than we earn (not good) unless, of course, we take some action. Sadly, the action means only one thing tax rises are on the cards, and here are my predictions on what the housing market can expect.
End to Stamp Duty Holiday?
In July of last year, the chancellor announced a stamp duty holiday to boost the housing market. This led to a 7.6% increase in house prices last year, taking the average house price to £250,000, a record high. Stamp duty holiday meant that there was no tax to pay on property transactions below £500,000. According to the Sunday Times, the stamp duty holiday has cost the treasury an estimated £3.8bn. So, it would make sense to end it?
However, most analysts predict that an end to stamp duty holiday is likely to stagnate the market, causing the house prices to fall slightly by the end of the year. According to the Bank of England, this is not good for the economy as the housing market activity is closely linked with consumer spending. There is a need for consumer spending to rise if the economy is to recover quickly. This could mean an extension of the stamp duty holiday, and it will likely be extended by another three months.
Could Stamp Duty and Council Tax be abolished altogether?
There is a suggestion of plans to abolish stamp duty and council tax altogether and be replaced with a proportional property tax levied on the home's existing value. According to WPI Economics, this would be based on 0.48% of the value of the house. The Tax would be revenue-neutral for the treasury, meaning it wouldn't raise extra cash for the treasury. Neither would it raise less, but it is considered popular with the red wall seats that the conservative party won in the 2019 general election.
It would mean an individual owning a £150,000 house in England would pay £720 annually, which is far less than the average band D of council tax in England, which in 20-21 was £1,818. However, a family home worth £1million would have to fork out £400 a month or £4,800 annually. However, this is unlikely in this budget but something that could be implemented and would be a popular win for the conservative government, which won on the agenda of levelling up.
Corporation Tax Increase?
This is more of an issue if you own a property portfolio through a limited company. It would mean that there is an increase in the Tax you pay on profits, a lot of investors since 2017 moved to own property portfolios through limited companies due to tax benefits. There are suggestions that the chancellor could reverse the cuts to corporation tax introduced by George Osborne, which had fallen from 28 per cent to 19 per cent.
This is more of a possibility because when George Osborne introduced the cut, he stated that the reduction in corporation tax meant that Britain was "open for business" and would lead to greater foreign investment. However, analysis done by the treasury suggests little evidence of increased revenue as a result of this.
In my opinion, this will be a risky move as things have changed quite substantially, not least as a result of Brexit. Britain needs to remain competitive and attract businesses to invest, following the exit from the world's largest single market.
I believe there will be incremental increases in corporation tax but could prevent businesses from investing due to uncertainty on taxes. It will have little to no effect on the housing market in the short term. However, in the long term, the economy's macro effects could lead to slower growth of the housing market. There is a likelihood that cooperation tax could rise to 23% or 25% by the end of the parliament, which would still be the lowest amongst the G7 countries but will still be unpopular with businesses.
Capital Gains Tax re-haul
Capital gains tax (CGT) is a paid on the gains made when selling personal items such as real estate, shares etc., worth more than £6,000. CGT is crucial for those investing in buy to let properties, holiday homes, and inherited properties as this does not apply to your residential home. Office for tax simplification (OTS) ordered a review of capital gains tax last year. The study recommended that the CGT be aligned with income tax rates. Currently, CGT is charged at 18% of residential property gains if you are a basic taxpayer (make less than £50,000 annually) and 28% if you are a higher rate taxpayer (make more than £50,000 annually). If your gains on the asset are below £12,300 a year, it is Tax-exempt; this is separate from your income tax allowance. OTS also recommended that the threshold at which people start to pay on capital gains be dropped to £5,000, i.e., any gains above £5,000 will be taxed as oppose to £12,300 previously. This would double the number of people paying capital gains tax.
I believe there is a real possibility that this could be introduced, if not in this budget, then not so long into the future. I do not think the threshold at which CG is taxed will be dropped all at once but could be phased in over three to five years, as was the case with mortgage interest tax relief back in 2017. Unfortunately, this will put off some investors. However, as this will be the case across the board, i.e., shares, bonds, etc., it will leave investors with little choice. Keeping cash reserves with record low-interest rates only raises the risk of your cash reserves loosing real world value due to inflation. However, it could put some investors off the housing market in the short term, but I believe CGT previously has been generous and will be fair if it is raised in line with income tax.
95% Government-backed Mortgage for First-time buyers
Speaking at the conservative party conference back in October of last year, the prime minister announced that he wants to turn "generation rent into generation buy". The government believes that currently, there are 2 million people who can afford mortgage repayments but struggle to get approval for low deposit mortgages. With the banks withdrawing high loan to value mortgages due to the coronavirus uncertainly in people's earnings, the government wants to help those struggling to climb the property ladder.
Currently, when you apply for a mortgage, you'll usually be allowed to borrow a maximum of four-and-a-half times your annual income, and the Bank of England's regulations mean lenders can only offer 15% of their loans at this level or higher. Theoretically, these rules and other affordability measures could be relaxed to enable buyers with smaller deposits to borrow more. Still, mortgage lenders would be reluctant to take on the additional risk, especially at a time of economic uncertainty due to the pandemic. One alternative would be for the government to guarantee the loans, meaning it would be responsible if borrowers' default.
I believe this could happen as it will be a popular choice with the voters and enables people to get onto the housing ladder. However, relaxing affordability rules and encouraging lending without rigorous stress tests could leave the housing market prone to crashes like the one in 2008. The resilience of the housing market this time around is a result of those rules bought in to encourage responsibly lending. I can only see this work if the government underwrites these mortgages, or else the banks will be hesitant to lend for the risk of default.
It would be good news for the housing market. However, this could push the house prices up even further and might mean that those it is designed to help could be the ones who it hampers the most, as they would need larger deposits as a result of higher prices and might not be able to get onto the housing ladder after all. However, it will be good news for many, and a step much needed if the stamp duty holiday ends.
These are my predictions for the budget, and I will be writing my review of the budget and what it means for the housing market after 3rd March. If there is one sure thing, taxes will have to rise. If not now, then not so long into the future.