Just as calm returns to the UK property after a volatile October, along comes the Budget. The aim of Thursday’s Autumn Statement is to fill a £50 billion black hole in the country’s finances without rattling financial markets.
For the residential property market, such events are normally the subject of conjecture and capital gains tax (CGT) rather than stamp duty generating more column inches this time round.
There is speculation the tax-free allowance for CGT may be cut or that rates will be aligned with income tax, which would mean higher tax bills when second-home owners sell. Capital Gains Tax is charged at 28% when selling residential property while the top rate of income tax is 45%. It would provoke turbulence if enough landlords decided this was a disincentive too far.
Changes to rules around mortgage interest relief, wear and tear allowances and higher rates of stamp duty have caused a number of landlords to sell in recent years and upwards pressure on rents would intensify if more followed suit.
Rental values are already climbing at their fastest rate in recent years across many parts of the UK, as supply struggles to keep pace with demand. Asking rents rose by 11.8% in the year to Q3 2022, according to Rightmove.
Nimesh Shah, chief executive of tax advisory specialist Blick Rothenberg, thinks the rules may change but questions whether the government would align income tax and CGT rates.
Nimesh explains: “The annual exemption may be halved to £6,000 or abolished, which would affect landlords selling lower-value properties but I’m not sure they will go as far as to align rates with income tax. Landlords have been squeezed hard in recent years and this would annoy their traditional voters without raising a lot of money.”
The Office for Budget Responsibility estimated that £15 billion of CGT would be raised in 2022/23, or 1.5% of all tax receipts. The timing of any changes will also be important. If landlords have a narrow window in which to act before the next tax year in April 2023, property disposals could accelerate and increase downward pressure on prices. Rising rents and falling property prices are presumably not the backdrop the government wants at the next general election.
“Given what Rishi Sunak did with corporation tax, I expect if any big changes were announced they would be deferred for a couple of years,” said Nimesh.
Savvas Savouri, chief economist at asset manager Toscafund, said markets should be wary of reading too much into what is said before this autumn statement.
He said: “My guess is the government is preparing the ground for something very onerous that in reality won’t turn out to be as bad as feared. Sunak will understand that the private rented sector is the lifeblood of the economy, and you would expect the government to want to incentivise landlords to remain landlords.”
Other areas that may see rule changes include non-dom tax status, although Nimesh expects any action to be limited to a consultation.
Meanwhile, Matthew Braithwaite, a private client partner at law firm Wedlake Bell, thinks the government may say more on stamp duty multiple dwelling relief following a consultation last year.
Overall, with a general election that must take place before January 2025, Savvas believes it would make more sense for government to target non-voters such as tech companies to help fill the black hole rather than landlords. “Rishi Sunak doesn’t need to frighten the horses; he just needs a goalless draw. The number one objective has been to calm gilt markets, which he has done. All he has to do now is keep them calm.”