Taxing consequences

Budget 2017

23 Nov 2017

Policy area: Tax & Finance

Published this week in Estates Gazette, Chief Executive Melanie Leech explains the highs and lows of Budget 2017.

Buried deep in the detail of the Chancellor’s Budget was a small paragraph on Capital Gains Tax (CGT). Small being the operative word. Without a mention in the speech, you’d have been forgiven for missing it altogether. Yet, what it lacked in word count, it made up in severity.

Non-resident disposals of UK property will no longer be exempt from CGT. What does this mean for international investors? The new rules will only apply to gains accrued after April 2019 – but after this point, international investors face increased taxation for investing in UK real estate.

At a time when we are seeing the uncertainties of Brexit influence, marked downgrades by the Office of Budget Responsibility to the forecasts for both economic growth and productivity, as well as lower real income for workers across the country, it is hard to imagine that the Chancellor really understood the impact of this proposal, or that he really wants to discourage the billions of pounds of investment that wants to invest in the future success of our nation.   

Increased taxation will discourage international investors from investing in our towns and cities. That will have a massive impact not only on the physical fabric of many areas but on the communities, that are crying out for better work, living and leisure facilities. And it seems the link between a better built environment and increased productivity – something this country urgently needs to address given its woeful position in the current OECD league table – has also slipped his mind.

The Government intends to consult on the detail of its proposal.  In the small print, we can see that it intends to develop an exemption for institutional investors from the new rule. That gives some hope that the Chancellor and his colleagues recognise the huge commitment investors want to make to the UK and want to avoid inadvertently damaging their ability to continue to deliver massive benefits across the country.  In many cases its precisely the type of investment that takes risk – and delivers the rewards both to the investor and the local community – that our lending regime would struggle to fund.  No question – UK PLC needs their investment and their commitment to our nation.   

There are also, thankfully, many things to welcome in this budget. As ever some of the commitments to spending on infrastructure (including digital) and housing, seem like familiar friends but there is also genuinely new money here, which confirms the Government’s commitment to the investment from the public sector to these critical areas.

The Chancellor has finally brought business rates reform forward. The BPF was one of the signatories to the letter to the Chancellor calling for the business rates multiplier to be calculated by reference to CPI, which is a much better indicator of commercial property rental growth than the now-discredited RPI. This is testament to our industry’s voice and ability to work with its peers to ensure government engages us in the mechanics of real estate, regulation and our customers’ prosperity.

Couple this change with more frequent revaluations, and some further relief for those hardest hit, and businesses up and down the country will be breathing a sigh of relief.  Not the fundamental reform that we will continue to argue is needed, but significant response to businesses’ concerns.

On housing, policy for most of the past year has been about getting the building blocks in place that will allow for a sustainable acceleration in housing delivery. That is to be applauded and the Chancellor continued that theme today. 

But while both the public and private sectors are now working together more effectively than ever trying to undo the damage caused by at least 20 years of housing undersupply, those investors who could make a significant difference to the volume of housing delivery are still being hit by the additional 3% SDLT surcharge.  Re-consideration of this surcharge is a missed opportunity. We called on the Chancellor, if he wasn’t brave enough to exempt institutional investors from this 3% altogether, to instead make the exemption for the affordable housing element of Build-to-Rent, giving impetus to the delivery of more homes with more manageable rents for people across the country.

Whilst many struggling to get onto the housing ladder will welcome the exemption from SDLT on purchases up to £300,000, even the OBR says a side-effect of this move will be to increase house prices and a more strategic approach including reversing the 3% surcharge for institutional build-to-rent investors would have a far greater impact on increasing much needed supply.

Overall, we should remain positive. The Chancellor, and the Government, have a tough hand to play. We have affected real positive change by holding out the prospect of a mature partnership between public and private sectors and we need to continue to set out that case clearly and to demonstrate the size of the prize on offer if the Government encourages rather than penalises the investors who will lay the foundations for our future success as a nation.