Autumn Budget and Spending Review 2021
Residential property investors were able to breathe a sigh of relief after yesterday’s budget. With no changes to income tax on property investment, investors can take advantage of a robust housing market. With rising rents and limited voids, investors will benefit from house price inflation, and house price growth will continue.
With no sign of the UK government tackling the UK’s chronic housing supply issues and construction cost inflation set to continue, now also appears to be a good time for new investors to enter the market.
In addition, there were no changes to Stamp Duty Land Tax for investors looking to purchase property, so no further burden for ‘new’ investors. With the housing market performing strongly, it appears the government has no desire to put the brakes on house prices or market sentiment or has bigger fish to fry.
Somewhat surprisingly, the Chancellor even threw in a bit of positive news for investors by extending the property payment window for Capital Gains Tax.
Changes to Capital Gains Tax
From 27 October 2021, the deadline for residents to report and pay Capital Gains Tax (CGT) after selling UK residential property will increase from 30 days after the completion date to 60 days. For non-UK residents disposing of property in the UK, this deadline will also increase from 30 days to 60 days.
This will ensure that taxpayers have sufficient time to report and pay CGT, as recommended by the Office of Tax Simplification. When UK residents dispose of mixed-use property, legislation will also clarify that the 60-day payment window will only apply to the residential element of the property gain.
State of the economy headlines
Chancellor Rishi Sunak delivered his autumn budget against the backdrop of better than anticipated economic performance. Key economic headlines identified by Sunak were:
- The UK economy is forecast to return to pre-Covid levels by 2022
- Annual growth is forecast to rebound by 6.5% this year, followed by 6% in 2022
- Unemployment is anticipated to peak at 5.2% in 2022, lower than the 11.9% previously predicted
- Since February 2020, wages have grown in real terms by 3.4%
- Borrowing as a percentage of GDP is forecast to fall from 7.9% this year to 3.3% next year
- Borrowing as a percentage of GDP will then fall in the following four years to 1.5%
- Inflation in September was 3.1% and anticipated to average 4% over the next year, reducing to 2% by the end of 2024.
Perhaps the only negative element of yesterday’s budget for the UK residential market is the new Residential Property Developer Tax (RPDT). However, this was not unexpected, as it was announced in February earlier this year.
Residential Property Developer Tax (RPDT)
The government will impose a new tax in April 2022 on the profits that companies and corporate groups derive from UK residential property development, to ensure that the largest developers make a fair contribution to help pay for building safety remediation following the Grenfell Tower fire. The RPDT will be imposed at a rate of 4% on any profits exceeding £25 million. As commentators start to focus on the detail of Wednesday’s budget, this new tax seems to have gone largely under the radar in property investor forums and blogsites. But it is important and here’s why:
When running their development appraisals, most developers will require a minimum of 20% profit on cost when doing their appraisals to purchase land for development. This new tax means to be in the same position on an after-tax basis; developers will need to increase their profits significantly, the only way to do this will be to increase prices. To assume that increased costs will not get passed on to the consumer flies in the face of basic economics.
Worryingly, the Policy Paper for the RPDT states, “This measure is not expected to have any significant macroeconomic impacts. Any impact on house prices and transactions is expected to be negligible, as new builds account for a small share of overall market transactions.”
What is concerning about this statement is that whilst it is true to say that new-build transactions account for a relatively small amount of the total number of transactions. However, this is somewhat missing the point, any new taxes imposed on the creation of new housing will have an impact on pricing.
This will ultimately mean that developers will be far more selective of what sites they buy for development and will spend more time negotiating with landowners to reduce pricing. For many sites it will ultimately mean that development schemes which will have otherwise been financially feasible now will no longer be pursued, thereby reducing the delivery of new housing. The reduced supply will put even greater pressure on the UK’s fragile housing market.
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