October 2024 Budget: What Does it Mean for the UK Residential Property Market?
In a widely-trailed Budget, there was one surprise for the residential property market and some disquiet over planned changes for non doms.
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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 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.
The five-year interest rate swap finished trading below 4.3% on Thursday after hitting a high during the day of 4.37%. 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 went up for the private equity industry but not residential property, Inheritance Tax rules were tweaked, and private schools will be charged VAT from January.
The fact Capital Gains Tax remains unchanged for residential property 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 help lessen the impact of the announced increase in stamp duty for second homes, which will rise to 5% from 3%.
This was one change that hadn’t been flagged and takes the top rate of stamp duty to 19%. Non-residential and mixed-use rates remain unchanged.
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 and £6,250 for first-time buyers.
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 (12% in the first two years followed by 15% in the final year) will be extended to three from two years, which is designed to encourage more inward investment.
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.
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