United Kingdom

Budget measures outline changes to property taxation

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Budget puts money towards developments in Canary Wharf and Barking

Pre-election tax priorities

The headline measures provide for a 2p cut in national insurance contribution for the average employee. However, with the annual growth in regular earnings at 6.2%, it is doubtful that this tax cut will make up for the impact of fiscal drag on employee income due to frozen income tax thresholds.

This tax cut is also only for employees and the self-employed, meaning letting and estate agencies that employ thousands of property professionals across the country will not be eligible for lower employer national insurance contributions. 

Tenant and long-term landlord incentives missing

While there was no specific mention of tenants in the budget, the removal of the Debt Relief Order (DRO) application fee may encourage more tenants in arrears to apply for DROs as it allows them to write off current rent arrears. However, tenants taking this route are likely to be evicted, and the DRO will remain on the tenant’s credit record, which will make it more difficult for them to find a rental property or take out a mortgage in the near future. Letting agencies would be advised to carefully monitor tenant credit checks to help ensure the right tenants are placed in affordable properties. 

Landlords considering selling their property have been given a tax boost by the Chancellor, with capital gains tax on residential property being reduced from 28% to 24%. This may encourage more landlords to realise any gains in property prices and sell up instead of continuing to keep a property in the private rented sector (PRS).

Anyone looking to acquire multiple rental properties will also be disappointed by the  abolition of the multiple dwellings stamp duty relief. Non-domicile property owners who hold a property within a foreign company may also be impacted by the new tax regime announced today. Details of the new regime will be published later in 2024.

These measures are not likely to bring about the investment needed in new PRS stock to reduce rents in the PRS, and the lack of new measures to help landlords or tenants with their costs or tax liability could be remembered at the ballot box.

Will new short-term let measures boost the PRS?

Across the PRS, the biggest change will be to short-term lets. The furnished holiday lets tax regime has been abolished, which currently makes it more profitable for second home owners to let out their properties to holiday makers rather than to long-term tenants to rent.

The government is also separately proposing a register of short-term lets and requiring planning permission for any properties new to the sector. Similar schemes have been proposed or are in place in Scotland, Wales and Northern Ireland.

The big question for those in the PRS is if these tax and regulatory changes will persuade short-term lets landlords to change their properties to long-term lets. 

Data from VisitBritain indicates that the introduction of the Scottish short-term let licensing scheme in October 2023 initially led to a 4% reduction in nationwide short-term let supply by November. By January 2024, however, there was a partial recovery, with only a 2% decrease compared to October 2023. This suggests that some landlords may have returned to the sector after complying with licensing requirements, or new landlords may have invested in short-term lets. Additionally, some former short-term let properties may have been sold or transferred to the long-term market, with the Scottish government reporting an additional 641 properties listed in October 2023 on the national landlord registry.

With incoming changes in tax and regulation in England, it seems likely that we’ll see a combination of short-term lets moving into the long-term market and some landlords selling up, especially with the reduction in capital gains tax.

Supply remains critical

The OBR forecast showing inflation dropping below 2% will be a welcome relief for leveraged landlords in the PRS, as it should bring with it a reduction in interest rates. This will be welcome news to the sector, which has seen an 11% rise in buy-to-let repossessions.

Extra funding towards housing development in Canary Wharf and Barking will help boost local supply by an additional 8,000 properties, but the details will be closely scrutinised to ensure some of these properties become part of the PRS.

While short-term let changes may cause a small uptick in PRS supply, the measures announced today will do little to impact the overall number of properties across the UK. Without concrete action to boost the number of both social and privately rented properties throughout England, Scotland, Wales and Northern Ireland, rents will remain high. 

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