The major tax cuts for individuals announced on 23 September 2022 have been reversed to the ‘status quo’ with two notable exceptions – the reversal of the imposition of a Health & Social Care Levy and the reduction in Stamp Duty Land Tax (SDLT).
The announcement of the tax cuts accelerated an increase in the Bank of England base rate, and while the reversal may have slowed further increases, no commentator is forecasting a drop in interest rates.
What does this mean for those in the property sector?
Commentators have been keen to forecast a housing crash, but does this stand up to scrutiny? The crash of the 1990’s was driven by excessive borrowing (up to 110% for certain privileged borrowers) and a lack of stress-testing on what would happen when rates went up. Banks and Building Societies whose borrowers could no longer afford their mortgage repayments stepped in and foreclosed on loans. In 2022, fixed rate mortgages and stress-testing by lenders mean that the position of borrowers – while of concern – is not going to trigger a mass sale of property. Many items of expenditure will be cut back before a property is sold at a loss.
The impact of the ‘Mini Budget’
In our opinion, we are more likely to see a slowing down in the housing market, with first time buyers and home-owners deciding to hold back on buying a new home. Estate agents are already reporting a fall in both sellers and potential buyers walking through their doors.
House builders should be looking closely at the delivery dates for sites, re-assigning their estimates of local demand and considering whether they should go back to planners to reconfigure sites and change the mix of properties being built. Sales Directors will need to ensure that the ‘cliff edges’ for SDLT are also factored into pricing. Achieving the Government target of 300,000 new homes a year looks more and more remote, however.
Investors in both residential and commercial property are looking again at forecasts of income – can tenants pay the rent required to support mortgages and other associated costs? Prices do not immediately fall as overseas buyers, who have benefitted from the fall in sterling, are providing tough competition.
For UK developers and investors, understanding the UK tax regime is therefore increasingly important.
Investors in commercial property need to ensure that they maximise their capital allowances claims. One change that has remained is that the Annual Investment Allowance, giving a tax deduction for investment in plant and machinery, has been confirmed as £1,000,000 a year – with no drop in April 2023. Investors should ensure they identify all expenditure where a claim can be made, employing experts in the field if necessary.
And the construction sector? This has been challenged by a lack of labour, material shortages, and major increases in costs – and will now have to assess whether their pipeline of new work is going to crystalise into contracts as infrastructure budgets are slashed. Those looking for opportunities to participate in the infrastructure projects and growth of the UK Economy will be anxiously waiting for the “’Budget’ on 31 October to see where the axe will fall.
A positive thought to end on
The personal tax cuts were all predicated on the basis that the extra money in the pocket of individuals would trigger investment in UK PLC – delivering an expansion of our economy, extra tax revenues, and building a world of opportunity for the next generation. Expecting individuals to choose this, over, for example, an overseas trip of a lifetime for the whole family, when there was no certainty that the tax breaks would remain in situ after the next election, was a big ask. Why not give tax breaks only if an individual invests in a government fund that is established to invest in a major infrastructure project that will deliver? For example, a ‘personal allowance’ of up to 5% of gross income that has to be paid into a Government Infrastructure Fund, repayable in full in five years’ time. This gives Government access to funds to deliver these projects – and High Net Worth taxpayers tax relief at up to 45%. A Government guarantee of repayment means this is a very attractive, low risk investment for individuals – and the Government gets access to a stream of funding.
Our key message – all players in the UK property and construction market need to ensure they maximise the deductions they can claim with Corporation Tax rising to 25% on profits from April 2023.
Would you like to know more?
If you wish to discuss this matter further, please get in touch with your usual Blick Rothenberg contact, or Heather Powell using the details on this page or the form below.
We are also holding a Property Tax Update event on Tuesday 25 October- please join us to discuss these issues and more by registering your place here – https://discover.blickrothenberg.com/property-tax-update