Chancellor Rishi Sunak has announced a £600bn spending spree to deliver a ‘plan for prosperity’ but what does it mean for landlords and developers?
The Chancellor, Rishi Sunak, delivered his first budget against the backdrop of the coronavirus pandemic and Brexit.
Compared to the era of George Osborne, there was little in the last week’s budget that property investors, developers and first-time buyers could cheer or be surprised about. In fact, the biggest immediate impact for those in property market was the Bank of England’s decision to reduce rates from 0.75% to 0.25%. Readers on variable rates should benefit immediately and others may want to fix borrowing at the current very attractive rate.
On a macro level, the Chancellor announced a huge spending spree of up to £600bn on infrastructure projects over the next five years! There was a particular focus on infrastructure to spark regeneration of the North and Midlands. I expect this could help increase property prices in key cities like Manchester, Leeds and Liverpool.
Sustainable and eco-friendly housing?
The government continued their commitment to affordable housing, with up to £9.5bn for the ‘Affordable Homes Programme’. This is likely to be welcome news for developers as the government will continue to seek partnerships with private developers to build new social housing.
Sadly, there were no specific measures announced to help or incentivise developers tackle climate change. This is despite the government enshrining into law to become Net Zero by 2050 and we are only eight months till the UK hosts The UN Climate Change Conference 25.
Doubling down on the Capital Gains Tax
On a more micro level, the much anticipated abolishment of Entrepreneurs’ relief came true but rather than scrapping it completely, it was cut by 90%. Under the revamp of the favourable relief, the total lifetime limit for ER was reduced from £10m to £1m. This will impact small scale property developers as the threshold is likely to be met quicker. This is a lifetime limit so those who have already used relief of £1m or more will not be eligible. As a consequence developers will have to pay twice the rate of Capital Gains Tax (CGT) from 10% to 20% when extracting profit through liquidating development companies. However, in family businesses, each member would be eligible for ER if the conditions are met and hence it could still be a very useful relief.
Whilst not widely noted, interestingly, angel Investors can still access Investment Relief of up to £10m per individual whereby 10% CGT is payable on disposal provided the necessary conditions are met.
For developers and businesses in financial distress due to the coronavirus, the government stated that they will receive support with their tax liabilities. Businesses can agree to a bespoke “Time-to-Pay” arrangement whereby they can defer HMRC liabilities. In addition, the Chancellor announced a coronavirus business interruption loan scheme to support businesses, whereby the government will guarantee 80% of each loan up to £1.2m. This will help banks lend swiftly to those in financial hardship.
The government also targeted non-resident landlords by applying an additional 2% stamp duty on any UK residential property from 2021. However, there are a number of unanswered questions, such as if the additional 2% surcharge will apply to the UK limited companies where shareholders live abroad. Further details will be provided when the government issue further guidance in the coming weeks.
Overall, a major issue for those in the property market was what the Chancellor didn’t say what is actually becoming the law from 6 April 2020.
For individuals selling residential properties after 6 April 2020, the CGT will need to be calculated and paid within 30 days, compared to the current rules where the tax would be due on 31 January following the tax year of disposal. This may cause substantial cash flow difficulty for landlords in the short term. It is important that sellers keep all the purchase cost information such as completion statements and incidental ready to calculate the liability. In addition, those selling their principal residence will now only have 9 months rather than 18 months of CGT free period once they give up their occupation of the property.
From 6 April 2020, landlords holding properties in their own name will officially be saying goodbye to the ability to deduct any of the interest finance costs from their rental income at their top marginal rate of up to 40% or 45%. The transitional period is now over, and from tax year 2020-21 onwards all finance costs will only receive a basic rate reduction at 20%. This will continue to have an adverse impact on buy-to-let landlords who have highly geared rental property portfolios.
Corporation tax remains at 19%
For corporate companies, despite the expectation that Corporation Tax would reduce eventually to 17%, the rate will now remain at 19% from 1 April 2020. There were also no announcements by the Chancellor in relation to the Annual Investment Allowance (AIA), so the extended AIA of £1m will revert back to £200,000 from 1 January 2021. Therefore, careful planning should be considered for businesses who are expected to carry out major capital investment works to benefit from the enhanced AIA.
For non-resident companies with UK underlying properties, there is a major change afoot which had been previously announced: the tax regime will shift from income tax (20%) to corporation tax (19%) from 6 April 2020. For the bigger portfolios, tax reviews are strongly recommended as there could be interest restrictions or instalment payments in the future.
There was no mention of Inheritance Tax reform, despite the influential Office for Tax Simplification Inheritance Tax Review last year. I expect changes will be coming in another Budget later this year.
