October 2024 Budget – summary & comments
First Published: December 2024 | Available in: Property Articles Your Property NetworkThe new Labour Government’s Chancellor, Rachel Reeves, delivered her first budget on 30 October 2024, following a long period of intense media speculation. This article looks at what changes were made that may affect property investors, plus a commentary.
Capital Gains Tax – property
Changes proposed:
The Basic Rate of CGT to rise to 18%, with the Higher Rate rise to 24% for all asset disposals, as of 30.10.24
Commentary:
There was intense speculation that CGT tax rates would be aligned with income tax rates, potentially increasing residential property CGT from 18% for Basic Rate taxpayers to 20%, and from 24% for Higher Rate taxpayers, to 40% (or even 45%!). So, there was no change for residential property owners. The CGT Annual Exemption is now £3,000, having been reduced from £12,300, so it was a small mercy that at least this modest exemption was unchanged too.
Rishi Sunak commissioned a report by the Office of Tax Simplification (OTS), which recommended that CGT rates were increased in line with income tax rates, but crucially, ALSO recommended re-introducing ‘indexation relief’ to strip out the part of a capital gain caused purely by inflation.
Personally I would have preferred this option as it means for many landlords who hold their properties for decades, a large chunk of the gain would be made exempt from tax, with only the taxable part taxed, albeit at a higher rate.
e.g. Joe Bloggs sells a property he owned for 12 years, for £200k, having paid £100k for it. Ignoring costs & CGT exemption, and assuming Joe is a Higher Rate taxpayer (most portfolio landlords are), there is a £24k CGT bill (24% of a £100k gain).
However if indexation allowance was introduced, and the Higher Rate of CGT became 40%, it may not always result in a tax increase. For example, across Joe Bloggs’s 12-year property ownership period, the cumulative inflation factor was 0.48 … so, 48% of Joe’s £100k gain is not taxable, meaning a tax bill of £20,800 (40% of the 52% taxable part of the £100k capital gain).
In this example, Joe ended up with a lower tax bill even though the CGT rate increased … personally I think this is a fairer system rather than paying a lower tax rate but on the entire gain which includes inflation.
Capital Gains Tax – business
Changes proposed:
Business Asset Disposal Relief (BADR) – previously known as ‘Entrepreneurs Relief’ – CGT rate to rise from 10% to 14% from 6.4.25, then rise further to 18% as of 6.4.26
Commentary:
This was a major, unwelcome surprise. There has always been a back-end tax benefit to business owners (albeit this excludes landlords), to encourage owners to build up a business by re-investing profits (rather than spending profits!). I can remember back in the 1990’s it was called ‘retirement relief’ … there has always been some kind of incentive to encourage businesses to grow.
This change means that the BADR rate will soon align with the 18% CGT Basic Rate, and so this tax relief is now just the measly difference between 18% and 24% for Higher Rate taxpayers. Or put another way, and 80% increase in CGT for business owners! (the current 10% rate increasing by 6.4.26 to 18% is an 80% increase).
This will affect property development / trading companies, where the company is either sold or liquidated, as well as property letting / management companies i.e. any type of company that isn’t a rental company. Plus, this will affect those who have a ‘day job’ trading business, such as an IT services, or consultancy, company.
Ironically, this will encourage some business owners to sell or close their company earlier than they otherwise would do e.g. if a company is sold or closed, currently a (say) £200k gain covered by BADR would mean a £20k CGT bill … however from 6.4.25 (only 5 months away!), the CGT bill would become £28k, and then 1 year later (6.4.26) would be £36k. So, in only a 17-month period, the owner of the company would face a CGT bill of £36k, instead of £20k. For anyone thinking of retiring, this could be just the push they need!
SDLT
Changes proposed
SDLT 2nd home surcharge to rise to 5% on 31.10.24
Commentary:
This was another unwelcome surprise. With rents at record highs across the country, and general sentiment among residential landlords at an all-time low arguably, to further disincentivise residential (specifically, not commercial) property purchases by landlords seems rather odd.
Overall, this is probably more of a niggle to most landlords, certainly at the lower end of the purchase price scale, given that generally most rental properties are bought with long term (decades?) rental in mind, and the extra costs can be ‘amortised’ over that long time period.
This will also make some property renovation projects on a ‘Buy to sell’ basis unprofitable, as the frictional costs of a purchase and sale, as well as the renovation itself, mean only the best projects will be worth taking on … arguably meaning fewer tired & dilapidated properties being brought back to life for rental or sale.
Inheritance tax
Changes proposed
IHT allowances are frozen for a further 2 years, so until 2030, PLUS personal pension assets are to be subject to full IHT as of 6.4.27
Commentary:
Governments seem to like freezing tax allowances! The £325k IHT main allowance has been the same since 2010, and will remain at that level for 20 years, until 2030 – just incredible! At least the IHT rate itself (40%) hasn’t increased, and the 7-year gifting rule is unchanged.
However, the big news is that pensions will not be exempt from IHT as of 6.4.27, meaning potentially a 40% tax bill for any unused pension fund on death (the remaining amount would also be taxable income when drawn down by the beneficiary).
This removes a valuable benefit for pensions, allowing pension wealth to be passed on with no IHT exposure. Many landlords who have used companies to either own property directly, or who may have set up a property management company, have been contributing ‘spare’ funds into a pension, partly to benefit from the corporation tax deduction.
This will change behaviours … it will make less sense to build up too big a pension pot, as it’s all very well getting a 25% corporation tax deduction, if you die with an unused pension pot that is then subject to 40% IHT!
It will also change the strategy about when to draw funds from a pension, rather than ISAs and other assets, as in many cases it will make more sense to draw off the pension each year, especially if the Personal Allowance & Basic Rate band isn’t used with other income.
This change will also affect the investment risk profile for pensions … previously a pension would be the last ‘pot’ from which to draw off funds, and so more risk could be taken within a pension, safe in the knowledge that the timescale for drawing off the pension could be many years away, so markets and investments have plenty of time to recover from a dip … whereas if pensions are to be drawn sooner, then the underlying risk profile of the investments may need to be more cautious.
Child Benefit / “High Income Child Benefit Charge” (HICBC)
Changes proposed
Possible changes to the way that Child Benefit must be repaid
Commentary:
The previous Conservative Government planned to make the clawback of Child Benefit based on total household income, rather than what each parent may earn. Currently, if either parent earns >£80k, Child Benefit is fully repayable, so for example a single-earner household with an £80k income gets no Child Benefit, whereas their neighbours with £60k per-parent earnings (£120k total) would get to keep all their Child Benefit … this clearly penalises single-earner families.
The Chancellor decided to scrap the above plan to base the clawback on household income, and so retain what is clearly an unfair system … which is very harsh on some families.
Employer’s National Insurance
Changes proposed
Employer’s NI is to rise from 13.8% to 15% as of 6.4.25, plus the employer’s threshold to reduce from £9,100 to £5,000
Commentary:
This was a headline-grabber in the media, but probably won’t impact many landlords directly, as few landlords have staff, and those that do already benefit from the £5,000 employer’s NI allowance. However, this will increase the cost base for banks, surveyor firms, solicitors, accountants (!), large suppliers like Howdens, B&Q etc and so, on the assumption that many such businesses will pass on at least some of the increased NI cost, prices for property-related goods and services will rise.
Summary
Overall, this was a mixed bag … given some of the media hysteria, it could be argued that landlords escaped relatively unscathed, given the only direct property tax increase was the SDLT surcharge increasing from 3% to 5%.
However, the increase in CGT for property developers (who therefore run a ‘trading’ rather than ‘investment’ business) and other businesses is very harsh, and those who have been building up their pensions with a plan to pass on the unused pension to children will potentially take a big IHT hit in the future.
Finishing on a more positive note, there were no changes to ISAs, the rate of tax relief on pension contributions is unchanged, as is the annual £60k annual contribution limit, and the planned increase in Personal Allowance and Higher Rate tax thresholds WILL go ahead in 2028 … so, until the next Budget!