With the Chancellor due to deliver her budget on 26th November, Chief Executive Mark Harris and Antony Cousins, Head of the Wealth Management team at SPF Private Clients, discuss the rumoured measures impacting the housing market and our investments, and assess what it all means.
Increase in Income Tax
In its election manifesto, Labour promised not to increase Income Tax but the dire state of the nation’s finances resulted in rumours that this promise would have be shelved. However, the Chancellor has since ruled out a hike in Income Tax. Mark Harris says: “While she would have been breaking a manifesto pledge, we feel this would have been the most prudent approach to take. It could have been positioned as a necessary yet temporary measure, perhaps something that could be repealed in a couple of years once the economy has recovered. It would quickly raise a lot of money and would be very straightforward. I don’t think anyone would have been too critical of that.”
Antony Cousins agrees: “Most people would think the fairest approach to raise money would be to add a penny or two on Income Tax for everyone, while at the same time cutting expenditure.”
Unfortunately, sticking to the manifesto promise will mean lots of tweaking of lots of taxes and upsetting a lot of people along the way, while not raising the money she needs.
Mark adds: “There is an opportunity to be bold, but fears she won’t be brave enough to take it.”
Introduction of a ‘Mansion Tax’
With an Income Tax increase off the table, the Chancellor needs to raise money by other means. A ‘Mansion Tax’ has been widely rumoured, with the suggestion of an annual levy on homes worth more than £2 million, hitting London and the South-East hardest. Savills estimates that over 60% of homes over £2m are in London, with just under 20% in the South-East.
However, while a ‘Mansion Tax’ may be popular among backbenchers, it will be difficult and time-consuming to implement, rather than a quick fix to the shortfall in the country’s finances. Properties will need to be valued and then homeowners are likely to challenge those valuations. It is suggested that such a levy might cost owners of properties worth £2.5m an extra £5,000 a year in tax, while a £3m home could generate an annual £10,000 bill. Those living in large houses who have equity tied up in their homes but don’t have cash to spare to pay an annual tax, will struggle to pay this levy.
Reforming Council Tax bands
It almost certainly looks as though there will be some changes to Council Tax. Potentially those in the top three Council Tax bands – F, G, and H – will see their properties revalued with higher levels of Council Tax introduced. However, this is unlikely to happen overnight with homeowners also likely to challenge these valuations. And the big question is whether it will raise enough money to fill the blackhole.
Capital Gains Tax on the sale of main residences
Currently, Capital Gains Tax (CGT) is payable on the sale of second homes and rental properties, but the Government is said to be considering introducing this on the sale of expensive primary homes. Critics have said this will slow down the sale of these homes, so it wouldn’t raise as much as the Government would like, and in recent weeks this rumour has died down a little, perhaps suggesting a change of heart.
Abolition of Stamp Duty
The Conservatives have pledged that they will abolish Stamp Duty if they are elected and Rachel Reeves may decide to steal their thunder. This would undoubtedly encourage housing transactions, which are essential for the overall health of the market, rather than what is happening with property values. Mark says: “Stamp Duty has become so complex and off-putting – when it was 1% for all, it was much easier to understand and not a deterrence to people moving home. Moving now is so expensive – the old days of moving round the corner to a slightly bigger property with an extra bedroom is long gone. It just doesn’t make financial sense. And yet activity in the market is so important not just to estate agents and solicitors, but mortgage brokers (!), lenders, removals people, decorators, builders etc.”
Some form of assistance for first-time buyers
Following on from the point above where transactions have slowed because of the cost of moving, another way to encourage more market activity is to do something to assist first-time buyers onto the housing ladder. Mark says: “While Help to Buy was criticised for giving homebuilders too much of a boost, a scheme which isn’t restricted to newbuild homes but enables first-time buyers with low deposits to choose between a newly built or a period home, would boost transactions and help those further up the ladder who are struggling to find a buyer. It will help jobs and social mobility which is good for the wider market and economy.”
Reduction in cash ISA allowance
Savers can currently invest up to £20,000 tax-free in any tax year in a Cash ISA but Rachel Reeves is said to want to reduce this allowance to encourage more people to invest in stocks and shares. Antony says: “The Government has to be careful – if the elderly, who lean more towards investing in Cash ISAs, are persuaded to put that money into stocks and shares, the client outcome could be considerably worse. You could end up with people getting into investments they don’t have an attitude for. This won’t be an issue for our clients as they get proper advice, but for those who only have a modest amount to invest and don’t take advice, that could be a problem.”
Cap on salary sacrifice contributions to pensions
Another rumour to emerge is a potential cap on salary sacrifice contributions into pensions. Antony says: “If a £2,000 a year cap on the amount of pension saving that can be done through salary sacrifice without National Insurance is introduced, that will put more costs on the employer which is a concern, particularly as it comes so soon after the employer NI hike in the last Budget.”
Antony says he understands charging Inheritance Tax on pensions, which was introduced last year, as pensions have only been out of the estate since 2015. “Putting them back into a person’s estate is not a great outcome, but I understand it – I don’t understand the salary sacrifice cap. This undermines the credibility of the whole pension system. It means basic-rate taxpayers will be proportionately worse off: how can that be better? It will impact a lot of people.”
However, while there have been rumours about a potential reduction in the tax-free lump sum pensioners can take at age 55 (rising to 57 from April 2028), Antony does not feel this is under threat in this Budget. That said, he says the damage has already been done. “It can now take 25 days to process a request, up from two or three days, owing to the sheer number of people who don’t need the cash, who are drawing it regardless. If the rules don’t change, they will find that they are now in a worse position. The Government should have released a statement saying it is not going to go down this route. I have been getting two or three clients a day emailing about this… it has been truly irresponsible.”
Time will tell
With just a few days to go until the Budget is revealed, at least one thing we will get next week is some certainty. But many feel that the delay in the timing of the Budget, combined with months of rumours and kite flying, means the damage has already been done. “The indecision and the worry mean many clients are not doing anything,” says Antony. “They are not moving house, corporates are not hiring – everyone is waiting to see what happens. It must be costing the Government billions of pounds, which is the one thing we know it doesn’t have.”
While it is difficult to make strategies for the future when you are dealing with the unknown, the team at SPF are here to help you make sensible decisions and react accordingly to any changes in the Budget which impact you. Get in touch for more information.
