In this blog, I'm going to share with you the Rishi Sunak budget announcement and how it affects us as property investors. I have to say, this has actually been probably one of the most anticipated budgets that I've ever seen, but actually I believe one of the best budgets for us as property investors, and it's definitely going to have a huge impact on the UK property market. So let's break down some of the key elements of this budget statement.
Capital Gains Tax Speculation
First of all, I think it's really interesting to note that some of the things that came out in the media months ago, haven't actually happened. Now it's very interesting, the media often report things that aren't actually facts, it's just what they think is going to happen, and people believe the media as if it's gospel. So I think you need to be very careful. What actually happened was one of the government think tanks suggested that maybe Rishi could increase the Capital Gains Tax, that's the tax you pay when you sell an asset such as property or shares and it's on the game. So if you buy something for £100,000 and sell it for £150,000 - your gain is £50,000. On that, you have a personal Capital Gains Tax allowance, and after that you pay Capital Gains Tax, depending on your personal tax rates.
There was talk about that going up to 40%, which would be a huge increase and will have a dramatic effect on all property investors who are selling property. You would have thought that this was definitely happening and that Rishi had said this, but in fact, it wasn't Rishi, it was the think tank, so you've got to be very careful when listening to the media. One of my property accountants said lots of his clients were really panicking, and thinking they had to very quickly sell property to avoid this huge extra tax. In reality, the chancellor made no changes this year to Capital Gains Tax.
Furlough Scheme Extension
I think it's probably very clear that the government will need to raise a huge amount of money from taxes in the future, why is that? Well, it's spent at least 280 billion pounds covering the economy, pumping money in, supporting people on Furlough, Bounce-Back Loans, CBILS etc, helping people get over this Covid 19 virus. So all this money has been spent, and that's not the end of it, there's more money spent because one of the things the chancellor announced was actually they're extending Furlough.
Now when the pandemic first happened in March and that's when the lockdown happened in March 2020, we looked at a Furlough Scheme that was going to go through till about July, then it was extended until October. I expected that when Furlough was going to end in October, we would see a drop in property prices because a lot of people unfortunately would have been made unemployed. Then they extended furlough to March, April, 2021, and there's a new budget announcement that's extending it further until September. I think this was a very clever move, combined with the budget announcement, there are going to be grants for some leisure related industry businesses. If you think about it, when the lockdown opens up and if the government's plan works, hopefully by June, July, the country will be turning very much to a normal state, and I think a lot of people who've been in lockdown for many months will be desperate to get out, desperate to spend some money.
So I actually think there's going to be the real boom in the economy in the summertime because all these people are spending money and wanting to get out and wanting to do things. This is massively going to help the leisure industry with grants to open up businesses again. I think they're going to be well-placed to bring all that extra trade in, they're going to need that staff to cope with everything so hopefully people will come off furlough and they will be gainfully employed. A very clever measure I think, to protect the UK economy.
“Yet as expected, they have extended this for three months for purchases up to £500,000, and they’ve extended it for six months up until the end of September for purchases up to £250,000.”
Stamp Duty Holiday
Now, some other things that have come in that are also going to affect the property market, there was a lot of speculation about the Stamp Duty Holiday, and would that be extended. As you probably know, one of the reasons the property market boomed in 2020, despite the recession and the COVID-19 pandemic, was the introduction of this up to £500,000 Stamp Duty Holiday. What that means is if you're buying a property up to £500,000, and if you're a first-time buyer or selling a property moving on, you wouldn't have to pay Stamp Duty.
Now as property investors, we still have to pay an extra 3%, and by the way, if you're an overseas property investor from April, you're going to have to pay an extra 2%. So 5% extra, if you are an overseas investor in total, I think it might put a few overseas investors off. However, for the general public, this has been a massive stimulant and has helped the property market grow. Now, many solicitors have been very busy, and just completely bogged under by dealing with this. Whenever they've done this before, back in July 2015 following the extra 3% charge for investors, many investors were trying to get property deals through. There was a boom in the market because of that, and the same thing is happening now. There were concerns that if this Stamp Duty Holiday were to finish on the 31st of March 2021, that suddenly the market would drop off a cliff. Yet as expected, they have extended this for three months for purchases up to £500,000, and they've extended it for six months up until the end of September for purchases up to £250,000.
Again, I think this is a very smart move, and I think it's actually going to help first-time buyers, as the average property price in the UK is roughly £250,000 pounds. Most first-time buyers are probably going to be buying below that, so this extra three months is going to help all of those people. So it's a three-month extension for up to £500,000 and then a further three months.In total six months, if you're buying properties up to £250,000, that's going to help stimulate the market and keep the market on track. I therefore don't think the property market is going to fall as much as it did prior to this budget announcement.
Stealth Tax Increase
Now, a couple of other things in the budget I think are worth noting, as I said, Capital Gains Tax has not increased at the moment, they've also said that Corporation Taxis remaining for this year at 19%. This is important because many property investors now hold property in a corporate structure, they have said that corporation tax will be going up to 25%, but it's phased. That is also dependent on the turnover and profits, more importantly of your property business. So as I said, I think actually it's not been as bad as expected, and in fact it's very good for us as property investors.
Interesting to note that normally the chancellor would increase the personal tax allowances, instead, he's decided to freeze those, not just for this year, but until 25, 26. What that means is that if you are earning more money each year, which typically happens because you get paid more because of inflation, you're actually going to start paying more and more tax over the next few years. So this is interesting, this is what we call a Stealth Tax, it's not a big headline grabber, but actually it means the government is going to make more money from this tax over the next few years, and so I think the general public will start to feel that in their pocket.
Some Property Investing UK Reminders
Now, there were lots of other things that were announced as well, but I think these are the key things that we need to consider. There are some things I want to remind you about though. Very often announcements are made, things are leaked and this particular budget has probably been the most leaked budget ever. I think they've done this because it's important to make sure the government is seen as supporting the economy and businesses and people as much as they can.
The government is desperate to help the economy recover because when the economy recovers, people spend money, there's more employment, those people are employed, pay taxes and it's more money coming into the buckets to help fund everything. As I said, the national debt of the UK has grown exponentially because of all the money they spent. They've spent three times as much more money in the last year than they did when they did the bailout back in 2008, 2009, when we had the global financial crisis. So all this money has to be paid for, so it's certain that taxes will go up in the future, but at least we've been given a little bit of breathing space.
If you have property and you were thinking about selling property, this year might be a very good year to do that because the market seems to be doing pretty well. You'll probably get a good price of the property. There are people who want to buy and remember the Capital Gains taxes have not been changed. What this means is, that you will be able to sell under the current tax regime, and you won't be paying this increased Capital Gains Tax. I expect that at some point in the future, the Capital Gains Tax will increase.
It was interesting to note that some of the allowances that were frozen include inheritance tax. Again, as people become wealthier because the value of their properties go up or their shares go up etc, they're going to be worth more. They will face more tax at 40% on their estate when they eventually pass away, and those limits, which are normally very slowly raised, have not been raised at the moment and probably will not be raised for the next few years.
So in summary, I think it's been a pretty good budget for us. It could have been a lot worse and that's a tactic sometimes used by governments. They talk about matters, everyone thinks its terrible, but then they pull it back and say it’s not as bad as everyone expected. They’ve still made increases, they’re going to get more revenue in, but it doesn’t feel as painful.
I hope that's been a really useful update. The market is constantly changing, legislation's changing, mortgages are changing, so it's really important to keep up to date.
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