Summer 2015 Budget: The UK property industry’s reaction

George Osborne, announcing last year’s budget.

George Osborne unveiled the summer 2015 Budget today, announcing welfare cuts and tax increases, as well as a new, higher minimum wage. What do the new measures mean for the property market? We round up what you need to know – and what the industry thinks.

Social housing rents

Rents for social housing will be reduced by 1 per cent a year for four years and tenants on higher incomes (over £40,000 in London and over £30,000 outside London) will be required to pay market rate, or near market rate.

These rents have increased by a staggering 20 per cent since 2010, noted Osborne, promising to “end the ratcher of ever higher housing benefit chasing up ever higher rents”.

Dr Anthony Lee, Senior Director at BNP Paribas Real Estate, warns that it could have “an adverse impact” on housing associations and developers.

“Social housing rents have – until now – increased annually by RPI plus 0.5 per cent per annum, underpinning housing associations’ business plans and making social housing an attractive investment proposition.  This announcement is likely to undermine housing association finances and risks making bond issues less attractive.”

“There is also likely to be an adverse impact on the viability of new developments,” he continues. “The rent reduction will reduce the amount housing associations can pay developers for the affordable housing element in their schemes.”

Housing benefits

Automatic entitlement to housing benefits for those aged between 18 and 21 will be abolished, as part of the government’s overall benefits cuts.

“There will be exceptions made for vulnerable people and other hard cases, but young people in the benefit system should face the same choices as other young people who go out to work and cannot yet afford to leave home,” said Osborne.

The household benefit cap will also be reduced to £20,000 (£23,000 in London), while  support through Child Tax Credit will be limited to two children for children born from April 2017.

Those aged 18 to 21 who are on Universal Credit will have to apply for an apprenticeship or traineeship, gain work-based skills, or go on a work placement 6 months after the start of their claim.

“The best route out of poverty is work,” said Osborne. “For those aged 18-21 we are introducing a new Youth Obligation that says they must either earn or learn.”

Terrie Alafat, Chief Executive of the Chartered Institute of Housing, says that they “support the government’s ambition of building more homes and helping people realise their aspirations of home ownership and work – but not at any price”.

“Our housing crisis means that millions of people have no choice but to rely on housing benefit to secure a roof over their head – including an increasing number of people in work, which has more than doubled from around 445,000 to just over a million in the last five years,” comments Alafat. “And cutting the benefit cap risks making large areas of England unaffordable for larger families on benefits.”

“Action to restrict entitlement to benefits is at best a stop gap measure and at worst increases poverty and misery for already poor and vulnerable people. Long-term, effective action would focus on increasing our housing supply not further restricting access to our already insufficient and inadequate supply of homes,” she adds.

The benefits cuts will be compensated for by the introduction of a new National Living Wage. This will be introduced in April 2016 at £7.20 an hour and replace the current minimum wage, with the aim of rising to over £9 an hour by 2010. However, it will only appled to those over the age of 25.

At the same time, the tax-free personal allowance will be increased from £10,600 in 2015-16 to £11,000 in April 2016, which means that the typical taxpayer will be £905 a year better off in 2016-17 than in 2010.

For those on the higher tax rate of 40 per cent, the threshold will increase from £42,385 in 2015-16 to £43,000 in 2016-17.

Inheritance tax

Inheritance tax will be abolished for homes so that people can pass their property on to their children or grandchildren tax-free after their death. At present, inheritance tax is charged at 40 per cent on estates over the allowance of £325,000 per person. From April 2017, each individual will be offered a family home allowance so they can pass their home on to their children or grandchildren tax-free after their death. This will be phased in from 2017-18.

The family home allowance will be added to the existing £325,000 Inheritance Tax threshold, meaning the total tax-free allowance for a surviving spouse or civil partner will be up to £1 million in 2020-21.

While this will benefit those inheriting estates, Mark Hayward, managing director, National Association of Estate Agents, warns that it could encourage people to remain in one property for longer, “thus leaving less affordable housing available for buyers”.

“We urge the Government to carefully consider actions that will upset the balance between supply and demand further. This will have a knock-on effect on those lower down the property chain,” he cautions.

Tax relief for landlords

Currently, individual landlords can deduct their costs – including mortgage interest – from their profits before they pay tax. Wealthier landlords receive tax relief at 40 per cent and 45 per cent. This tax relief, however, will be restricted to 20 per cent for all individuals by April 2020.

The announcement follows a warning from the Bank of England last week that the buy-to-let sector could pose a risk to financial stability. Osborne promised to act “in a proportionate and gradual way”.

From April 2016, the “wear and tear allowance”, which allows landlords to reduce the tax they pay (regardless of whether they replace furnishings in their property), will also be replaced by a new system that only allows them to get tax relief when they replace furnishings.

Henry Woodcock, Principal Mortgage Consultant at IRESS, comments: “The potential revenue generated by cutting the tax relief on buy to let mortgage interest was clearly a draw for the Chancellor, but it may trigger unintended consequences. Buy to let has been the key area of growth in the mortgage market, and changing its tax treatment is likely to dampen mortgage activity and demand from property investors, which will hit overall lending figures. Equally, we may see a number of landlords leave the market if their costs rise, which in turn will lower the potential revenue of the move.”

Ending permanent non-dom status

Non-domiciled individuals (non-doms) live in the UK but consider their permanent home to be elsewhere. The UK rules currently allow non-doms to pay UK tax on their offshore income only when they bring it into the UK, but permanent non-dom status will be abolished from April 2017. From that date, anyone who’s been resident in the UK for 15 of the past 20 years will be considered UK-domiciled for tax purposes.

Dr Anthony Lee, Senior Director at BNP Paribas Real Estate, welcomes the move as a potential driver of demand for prime property, “as non-domiciled owners seek to take advantage of UK inheritance tax relief, and therefore sell property held abroad and ‘repatriate’ their assets to the UK”.

Rent-a-room relief

The rent-a-room relief is designed to help homeowners who rent out a room in their home.

“It’s a good scheme, particularly in a world where more and more people are renting out rooms online,” said Osborne, “but the relief has been frozen at £4,250 for 18 years. Next year, we will raise it to £7,500.”

SpareRoom has campaigned since 2009 to get the current threshold raised, and even assisted Solihull MP Julian Knight with his Budget submission to the Chancellor earlier this month.

Matt Hutchinson, director of the flat and house share site, comments: “The Chancellor’s change to the Rent A Room scheme has potentially huge implications for the scarce supply of affordable rented accommodation. In the midst of a housing crisis, and with building levels behind all forecasted targets, it’s vital we make better use of existing stock and this will do just that. All too often housing initiatives benefit a select few – but this helps millions of renters and homeowners.

“Encouraging people to take in lodgers could help them avoid repossession when interest rates rise and their mortgage repayments are adjusted. Lodger landlords can earn, on average, £8,335 per year in London, and £6,071 across the rest of the UK.”

“Nothing to address housing costs”

Overall, the reacton has been mixed to negative, with concerns raised about the lack of emphasis given to housebuilding, the major component in the UK’s current housing crisis, and the potential impact of Osborne’s proposals.

Campbell Robb, Shelter’s chief executive, says: “This Budget has done nothing to address this country’s sky high housing costs, whilst slicing away at the help struggling families depend on to stay in their homes.

“We need a system that’s fair, but if George Osborne really wants to bring down the benefit bill his first priority should be to invest in building safe, secure and genuinely affordable homes.

“Today’s cuts to housing benefit will be a huge blow to the millions of private renters who depend on it to keep a roof over their heads. Cutting housing benefit altogether for 18-21 year olds could be nothing short of catastrophic, and lead to a rise in homelessness.

“It’s good to see the removal of some tax breaks for wealthy landlords and any move, however modest, that helps hard-pressed social renters is positive. But, as the OBR predicts, this will mean housing associations build fewer new homes.”

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