October 2024 Budget: What Does it Mean for the UK Residential Property Market?
Updated 1 November: In a widely-trailed Budget, there was one surprise for the residential property market and disquiet over planned changes for non doms.
7 minutes to read
The Labour government waited four months between the general election and the Budget to ensure its plans would not provoke a negative reaction on financial markets.
Although there was no “mini-Budget” moment on Wednesday, gilt yields rose as markets digested the inflationary impact of some of Chancellor Rachel Reeves’ spending and borrowing plans. It will mean added upwards pressure on mortgage rates.
There were further jitters on Thursday as bond yields and swap rates rose and Sterling showed signs of weakness against the US dollar. Yields climbed after markets opened on Friday before falling back by lunchtime, helped by some weak US jobs data.
The five-year interest rate swap was trading just above 4.3% on Friday morning. While this compares to 3.8% at the start of the month, it is still significantly below the 5.6% recorded after the mini-Budget in September 2022.
The government will no doubt continue watching the reaction of financial markets closely.
Taxes
With one exception, you could have guessed the content of the Budget two weeks ago.
Among the changes announced, National Insurance contributions for employers rose, Capital Gains Tax (CGT) went up for share sales and the private equity industry, Inheritance Tax rules were tweaked, and private schools will be charged VAT from January.
The fact CGT remained unchanged for residential property (18% or 24% depending on your tax band) was positive news and may encourage more buyers into the market, some of whom had been holding off in the expectation the rate may rise.
Any boost to demand may lessen the impact of the announced increase in the additional rate of stamp duty for second homes. It rises to 5% from 3% and hadn’t been flagged by the media or in the Labour Party manifesto.
Either way, it takes the top rate of stamp duty to 19%. Non-residential and mixed-use rates remain unchanged.
Price renegotiations between buyers and sellers will inevitably take place in the coming weeks but recent history has shown that transaction taxes eventually become priced in. That said, the Laffer Curve theory that revenues will fall if tax rates rise too far will be tested – in the property market and beyond.
Billed as a measure to help first-time buyers, it could, however, have unintended consequences for renters if it further disincentivises landlords, which could reduce supply and push up rents.
Elsewhere, the nil-rate band for stamp duty will revert from £250,000 to £125,000 next April. It means stamp duty bills will rise by up to £2,500. A similar reversion means up to £6,250 in additional stamp duty for first-time buyers, which won’t be welcome news for anyone trying to get on the housing ladder. It will be a busy March for conveyancers.
Overall, the new government appears to be putting more emphasis on the public rather than private sector. Fortunately, the private sector is adaptable and new opportunities for the property market may emerge. That could range from the greater use of equity release due to inheritance tax changes, stronger house prices near state schools and higher demand in the build-to-rent sector if first-time buyers come under more financial pressure.
Non Doms
On the issue of non doms, the government stuck closely to its manifesto plans for a four-year residence-based regime that doesn’t look hugely competitive compared to countries like Italy.
However, the transition period during which people can bring money into the UK under the new system at a lower tax rate will be extended to three years from two, which is designed to encourage a burst of inward investment. The rate will be 12% in the first two years followed by 15% in the final year.
Furthermore, pre-existing overseas trusts will not be charged inheritance tax at 40% and will instead be subject to the so-called relevant property regime, which levies a maximum of 6% at each ten-year anniversary of the trust’s creation.
Other than that, there was little comfort for non doms. Indeed, the abolition of business property relief for inheritance tax meant the announcement was in some ways worse than feared for lobby group Foreign Investors for Britain (FIFB).
“Foreign Investors for Britain is deeply concerned about the potential implications for the UK’s status as a leading destination for international investment. These proposals could drive investment away from the UK, with significant impact on the economy and future public services,” it said.
“While the detail is still being digested, the budget contains a bombshell for entrepreneurs on Business Property Relief which will mean that they will pay 20% IHT. This will drive away from the UK those we should be trying to retain and attract. The government has failed to consult on this critical element of its tax policy and is missing an opportunity to introduce a Tiered Tax Regime which will be fair and still be competitively attractive. As drafted these changes will drive the international community to Switzerland, Italy etc and they will take their expenditure and investments with them.”
FIFB will continue to engage with the government, and we will provide further updates.
Demand in high-value markets has been softer in recent months due to nervousness ahead of the Budget, as we explored here. However, for context, non doms are just one subset of buyers in prime and super-prime property markets.
Affordable housing
The big residential development focus of the Budget surrounded affordable housing. The government announced it will increase the Affordable Housing Programme (AHP) by £500 million, to support the delivery of 5,000 additional affordable homes.
An increase in funding is a step in the right direction and comes at a time when many housing associations have cut back on development pipelines to focus on commitments to remediate existing stock. Longer-term, a substantial increase in grant funding beyond the end of the current AHP in 2026 is needed to deliver the affordable homes required across the country.
The government has also proposed a five-year rent settlement for social landlords, with the intention to increase rents in line with CPI plus 1%, as is the case under the existing settlement. The move will provide transparency for tenants and certainty for social housing providers to better support long-term planning. However, whilst the certainty of income is welcome, it needs to be viewed in the context of the competing and ongoing financial pressures faced by social housing providers.
Supply-side reform
There has been a clear focus from the new government to tackle the UK housing shortage, led by the setting of an ambitious housing target of 1.5 million homes.
Announcements in the Budget confirm that the government is committed to supply-side reform, with over £50 million set aside to better resource planning departments and help unblock large sites which are stuck in the system. An additional £47 million to free up homes stalled due to nutrient neutrality will also be welcomed.
However, alongside supply-side reforms, demand side stimulus to support first-time buyers is required and was notably absent from the Budget announcements.
Expanding market participants
The announcement of an additional £3 billion of support for SMEs and the Build to Rent (BTR) sectors to access cheaper finance sends a clear signal that the government recognises that a key component of expanding housing supply and speeding up delivery rates will be embracing a variety of tenures and supporting more players in the market. According to the BPF, the additional funding is split between two pots. The first totals around £2 billion in the form of the PRS Debt Guarantee fund which has been reopened for applications. The second is the £1 billion ENABLE Guarantee program that encourages lending to SMEs the UK.
BTR has the potential to play a key role in addressing the UK's housing shortage and, at the same time, help to balance the supply and demand imbalances we’re seeing in the private rental sector.
Reforming Agricultural Property Relief (APR)
From April 6, 2026, the government plans to reform APR, which currently offers a 100% inheritance tax (IHT) exemption for qualifying agricultural land. While estates with combined agricultural and business assets below £1 million will continue to enjoy the full 100% relief (unlikely to apply to a large number of farms), those exceeding this threshold will see a reduced rate of 50% applied to the value above £1 million.
Read our other Autumn Budget 2024 blog: The Implications for Commercial Real Estate here