UK Property Market Outlook: Week Beginning 1 March
For the UK property market, what the Chancellor says will prove as significant as what he does in this week’s Budget
4 minutes to read
A week before Christmas, when an unusually early date in March was chosen for the Budget, the plan may have been to give the economy some breathing room before tax increases in April.
The announcement of a third national lockdown ten days after Christmas means it may be the autumn before the Chancellor more actively presses ahead with his revenue-raising plans.
For the property market, like the rest of the economy, Wednesday’s Budget will be focussed on getting the economy down the home straight of the pandemic rather than what happens on the other side.
However, when the time comes to raise taxes, there is a balance to be struck given how historically cheap it remains for the government to borrow.
Gilt yields have risen recently due to concerns that stimulus programmes will stoke inflation but the ten-year bond yield remains below 1%. Fifteen years ago the figure was closer to 5% and in the early 1990s it was above 10%. At this stage in the pandemic, a prolonged period of inflation is not on the horizon and quantitative easing will continue to keep downwards pressure on bond yields.
“The cost of debt is incredibly cheap but the government’s endgame is clouded by politics,” said Nimesh Shah, chief executive of tax advisory firm Blick Rothenberg. “Rishi Sunak does not want to be known as the Chancellor who left a black hole in the economy, particularly if he has higher political ambitions.”
Breaking the so called triple-lock on national insurance, income tax and VAT would also have a political cost although there are media reports the Chancellor will freeze the threshold for the basic rate of income tax. With a wealth tax currently off the table, Shah says this explains why the focus is on areas like corporation tax and capital gains tax (CGT).
One support measure that may be extended alongside the furlough scheme is the stamp duty holiday. Latest reports suggest it will end in June rather than 31 March.
“Extending the holiday would be a quick thing to do without consuming a lot of legislative time or effort,” said Sean Randall, a partner at Blick Rothenberg and chair of the Stamp Taxes Practitioners Group.
This means the likelihood of it happening is fairly unknowable, even this close to the Budget.
However, the fact the government has not denied reports that there will be a three-month extension is significant. If the holiday did end in March, it would be accused of allowing momentum to drop at an important time by not responding to the speculation.
An extension is fair because completion dates for many buyers and sellers have been jeopardised through no fault of their own, but there will come a time that it overstays its welcome, as we discussed last week.
As lockdown measures are lifted this year, the UK housing market will attempt to revert to seasonal patterns of activity and an improved balance between supply and demand. Both of those things will be made more difficult by a fluid tax landscape. Continued speculation around the end of the holiday could prove more damaging for the housing market than the end itself.
“Wherever you draw the line you will have people who will be caught out,” said Matthew Braithwaite, a partner at law firm Wedlake Bell.
Other support measures for the housing market to be announced on Wednesday include a guarantee scheme for 95% mortgages on properties worth up to £600,000.
On capital gains tax, Shah believes it is too soon for the Chancellor to align rates with income tax, but believes it will happen eventually, possibly in the autumn. “It wouldn’t fit with a Budget that will primarily be about the extension of support,” he said. “What he says will be more important than what he does because it will signal what may come later in the year.”
Braithwaite agrees on the timing of a CGT rise and says any sense of urgency among his clients to dispose of property has receded in recent weeks as speculation around an imminent change has died down.
“Along with a wealth tax and inheritance tax I suspect that will be put in the ‘too difficult’ box at this Budget,” he said. “More subtle tax changes are likely. For example, it’s not beyond the bounds of possibility that ATED will be increased.”
The fact capital gains tax rules are tied so closely to inheritance tax means a more extensive reform of both was possible in future, Braithwaite said.
“There is actually a case for a wealth tax to replace inheritance tax and capital gains tax,” said Shah. “It would mean an inflow of tax at a reasonable rate over a lifetime rather than on death or the disposal of an asset.”
A series of tax consultations will be launched later this month, which Shah said was evidence the government is thinking more widely about tax and is unlikely to announce anything meaningful before then.
Could Covid-19 be the trigger for a more profound reform of property taxes? Or will the inherent inertia in the system prove too great?
“The main concern of this government will be to present its finances in good order before the next election,” said Shah. “To undertake these sorts of bigger changes you need a big majority and a clear five-year run. We almost had that with Rishi Sunak but then the pandemic hit.”