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Emergency Budget report!

publication date: Jun 23, 2010
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George Osborne

It's been a twitchy few weeks in the property business as pundits listened to Coalition mutterings and consulted crystal balls, but in the event, today's Emergency Budget wasn't all that frightening after all. (Download the full text at bottom of story).

Capital Gains Tax (CGT)
The main fear for the Private Rented Sector and also for those involved with selling homes to investors was a mass exodus from Buy to Let investors when they were hit with a rise in Capital Gains Tax (CGT) which would take the rate from 18 per cent to 40 per cent.

In fact George Osborne was more modest in his actions to put the country back on its feet and increased CGT to 28 per cent, and then only for higher rate taxpayers. He also left the taper relief system alone. The increase is live from tonight so there is no escape for those thinking of selling to avoid the increase, which is good for the market as a whole as it avoids the possibility of a flood of rented homes coming up for sale.

Liz Peace, CEO of the British Property Federation, said, "Simplifying the CGT rise to 28 per cent by not tinkering with taper or indexation relief shows a welcome desire to keep things simple. Thankfully, the rate of CGT has not been brought into line with higher rate tax levels but this is something that many will not be happy about. Particularly, buy-to-let investors who have propped up the housing market over the last 20 years will suffer and this could hit the future supply of rented housing. However, on the whole there are positive signs here about the new government's tax philosophy.”

Emergency BudgetMany will feel that the increase is still going to cause significant pain. Rightmove told PROPERTYdrum that Capital Gains Tax increases could “permanently dampen the enthusiasm of the all-important investor market and lead to an increase in rental prices”. Landlords have historically looked to capital appreciation to supplement rental returns. Lettings agents have already reported chronic shortages in property to let and new landlords recently, which will feed through into upwards rental pressure for tenants.

Miles Shipside, Commercial Director of Rightmove said that prices look set to drop back again this year. “Tenants at present have few other alternatives to satisfy their housing needs due to the mortgage famine. The prospect of rising rents will be a blow to them but a welcome boost to landlord’s overall returns, helping to offset the increase in CGT. Investor buyers have helped replace deposit-strapped first-time buyers and this rise in CGT removes an element of support for the all-important bottom end of the housing market. However a drop in prices could help rekindle their interest following this CGT setback.”

iSurveyJennet Siebrits, Head of Residential Research at CB Richard Ellis said: “We are pleased that the increase in Capital Gains Tax will take effect immediately, as it will ensure that there is not a sudden rush to sell off assets to avoid the higher rate. Second homes and buy-to-let properties only make up a small proportion of the UK housing market so we were not talking about vast quantities of homes flooding the market, but there was some concern that this could cause further price falls and undo the progress we have made so far.”

As predicted the rate of VAT will increase to 20 per cent but not until January 4 2011. This will help housebuilders but will put further pressure on the retail sector.

Furnished Holiday Lets - tax break reinstated

George Osborne also announced that the previous Government’s plans to abolish tax benefits given to owners of holiday homes will bring a direct benefit to this sector which will be well received by people in that market.

Housing Benefit
Housing Benefit is set for major reform under the new Government and, as expected, the spending cuts in this area have started with the imposition of a maximum rate of benefit for each type of property. A measure that the Chancellor says will save 1.8 billion a year.

BudgetLiz Peace, chief executive of the British Property Federation, said, “Cutting the housing benefits bill is long overdue and we have long said that housing payments need to again be made directly to landlords to avoid the money being taken by tenants and spent on other things. In introducing a cap on housing expenditure, it is vital that claimants in more expensive areas of the country are not sidelined and forced out of homes they have lived in for years. This would create more problems than it would solve, as it is vital that we do not end up creating more ghettos or forcing people to travel miles to work.”

And there’s good news for business as well, with From April 2011, the threshold at which employers start to pay National Insurance will rise by 21 per week, above indexation. Corporation Tax will be cut next year to 27 per cent, and by one per cent annually for the next three years, until it reaches 24 per cent. The small companies' tax rate will be cut to 20 per cent.

Download the complete Budget
The complete Budget is attached here as a PDF. Good bedtime reading for some!