So, the UK has a new coalition Government in Number 10 Downing Street - and the clock has started ticking on its plans to revitalise the nation's finances.
The new Chancellor of the Exchequer, George Osborne, was barely through the door before promising to deliver GBP6 billion in spending cuts along with a framework for longer-term spending cuts, reforms of income tax and some major tax rises. He also announced that the new government will hold an emergency budget on June 22.
Here, we examine the Government's plans and explain what the first change in power for 13 years means for the UK property market.
Luckily closing the UK's budget deficit is one of the key objectives both parties can agree on - but the Conservatives and Liberal Democrats are also very close to each other on property issues:
- Firstly the coalition government has followed a long-held Conservative Party pledge to remove the requirement for homeowners in England and Wales to provide home information packs (HIPs) when selling their homes. Communities’ secretary Eric Pickles and housing minister Grant Shapps announced that they have suspended HIPs with immediate effect, pending primary legislation for a permanent abolition.
This move was widely welcomed throughout the property industry and will remove some of the pointless red tape associated with buying and selling property in the UK. Sellers will still need to commission an energy performance certificate, but won’t have to receive it before being able to market their property.
- Sticking with the “Green theme” both parties want residential developers to ensure their new homes are more environmentally friendly.
While this is without doubt good news for the environment, developers may be less excited by the prospect of even more planning regulations and added costs to their already dwindling profit margin. Some may simply decide to focus on commercial or industrial development adding further pressure on the UK’s undersupply of housing stock.
- Both parties also want an end to the old Labour government's desire to have national target for new house-building. Instead, they want local authorities to determine how many new homes can be build locally and provide financial incentives for those local governments who agree to having more homes in their areas.
This will be an interesting one. It’s no secret that the UK has a shortage of housing. The previous Government’s target of 3 million new homes by 2020 was aimed at meeting projections for growth in the number households but this target is now in tatters with the industry struggling to build even 100,000 homes this year. The planning process in the UK is already so cumbersome and held up by red tape that leaving local governments to their own devises can only exacerbate the problem. New homes means more traffic, more bins to collect and more kids to find school places for – so I can hardly see any council bashing down No 10’s door for the promised “financial incentives”. So while this is undoubtedly bad news for those trying to get on the UK housing ladder it means that investors will see some good rental growth from the private rented sector as even more people will be forced to rent.
- To help relieve some of the pressure and reliance on new homes to house the growing population both parties wants more emphasis on bringing empty old homes into use. It’s estimated that there are about 750,000 of them in the UK.
This is a novel approach to adding some more homes to the UK market but I can see a long, slow process with many a legal battle and much red tape. Even then 750,000 homes are still a far way off from the 3 million needed by 2020.
Maybe one of the biggest changes to affect property investors is the new government's commitment to raising the rate of capital gains tax paid on second homes back up towards income tax levels. This means that all capital gains made above the tax-free £10,100 per year allowance are likely to be charged at a rate of 20%, 40%, or even 50%.
The coalition says this will help pay for raising the income tax threshold and have also been stressed that increases will be for non-business assets - with allowances made for entrepreneurs. This will be of little reassurance to property investors who will find it difficult to avoid a bigger tax bill, as the nature of the investment means they are not able to sell chunks of properties over a period of time in order to minimise CGT.
Previously CGT was paid at income tax level, but there was a system of taper relief that allowed investors to cut their tax bill depending on how long they had owned a property. For example a higher rate taxpayer could see their tax bill fall from 40% to 24% over ten years. It is unclear whether a move to raise CGT would also include the reintroduction of taper relief, to encourage long-term investment. So will buy-to-let investors sell up in their droves and what affect will this have on house prices?
This is a matter of some debate and until the emergency Budget arrives we won't really know, but I can’t see it happening.
Firstly, the astute buy-to-let investor is in the game for the rental income and long-term return – not a short-term capital gain. Many look for a steady income for their retirement and intend to leave the property to their children so capital gains tax is not so important.
Secondly most buy-to-let mortgage deals had standard variable rate (SVR) linked directly to the Bank of England’s base rate, For example base rate plus 2%. With the Bank of England hinting that rates may stay at their historically low levels of 0.5% for some time, and with rental returns on the increase – most investors will hold on tight. Furthermore those who had been playing the game right all along will also have rental income that covers their mortgage payments by at least 125%. This extra cash can be used to repay mortgages over time, so that by the end of a set time period properties are owned outright.
It will also depend greatly on how the CGT changes are ushered in. If it’s trailed for implementation for the new tax year next April - then it will give homeowners time to plan ahead. Those who feel it’s worth taking a lower tax bill and cashing in will have ampel time to sell properties and this could bring a sizeable number of properties to the market. Wither or not buyers will have access to mortgage finance in order to take advantage of these sell-offs remains to be seen. The strength of the housing market may also play a big role here as it’s unlikely that investors are going to sell massively under market value when they have a cash-flow positive investment putting money in the bank month in month out.
On the other hand, if the new CGT rate is brought in immediately, then we may actually see fewer properties come onto the market. Selling-up may no longer be an attractive option for investors when their tax bill has suddenly more than doubled. This might actually see house prices climbing, by creating a further shortage of homes for sale.
The next six months will prove whether the property industry benefits from these fiscal measures, or suffers as much as individual Britons may have to. In the meantime, with the exchange rate in disarray, it's the overseas buyers and investors who may have most to gain…
If you have questions or want to talk through how Smuts & Taylor can help you invest in London with confidence, feel free to call the office on +2711 083 6366 or contact me directly on +44797 1000 667.
Wishing you health, wealth and happiness,
Mike Smuts
Property investor and MD of Smuts & Taylor.
