Knight Frank Residential Research report - Budget 2008
Date: 25th March 2008 | 
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Liam Bailey, Head of Residential Research, reviews the impact of this year's budget on the property market.
The budget on 12 March threw up few surprises, and although it has been dubbed a green budget its interest to the property market lay, not in environmental issues but in changes announced to stamp duty land tax, capital gains tax and the tax status of non doms.
Base Rates
Inflationary pressures and the downgrading of the Treasury’s growth forecasts did not give the Chancellor much leeway to make generous concessions to the UK housing market this time round. Although there have been two quarter point falls in interest rates in recent months it will take some time before this impacts the market. Indeed, if life is to be breathed back into the housing market of England and Wales (Scotland is proving very robust at present) we would like to see the Bank of England announce further cuts to take base rates somewhere between 4.75% at 5% by the year end. Whether this will happen next month remains to be seen, though signs from the minutes of the most recent monetary policy meeting suggests a softening attitude towards a cut, if not in April then possibly May.
Stamp Duty Land Tax
It is worth noting that in 1997 average house prices were £68,000 with stamp duty set at £60,000. House prices now average just under £200,000 but the threshold for stamp duty land tax has been lifted to only £125,000. Despite much lobbying to get the threshold raised to at least £200,000 the Chancellor left this unchanged in his budget. Instead he choose to assist those who wish to buy a house through a shared equity route. As a result he declared that stamp duty will not now be payable until the household owns 80% of the equity in the property.
It is our view that despite this and with rising deposit levels, first time buyers will continue to find it hard to access the market and may instead choose to rent to the inevitable benefit of the buy-to-let sector.
However, picking through the 200 page book of notes attached to the budget, environmentally conscious house purchasers are able to find one small crumb of comfort; the Chancellor also announced a zero stamp duty levy for those in zero-carbon flats.
Capital Gains Tax (CGT)
The Chancellor also decided that the changes to CGT first announced in the Pre Budget Report last October are to go through unchanged. This means that in the new tax year those who wish to sell their second or rental homes will face a CGT bill of just 18%, down from 40%.
Whether this will lead to a stampede to sell is doubtful. Our research would suggest that the majority of professional landlords are in the market for the long-term and while one or two may wish to capitalise an asset for reinvestment this measure may not be taken up by them en-masse. Rather it is likely to be well received by the amateur property investor who, having entered the market in the last few years may not be well prepared for the current trying market conditions. As such they may use this rule change as an opportunity for a beneficial low-cost exit route.
Non-doms
The issue of the tax status of foreign workers non-domiciled in the United Kingdom (non-doms), has been a long and tortuous one and the Chancellor’s decision to moderate the more draconian changes outlined in his original proposals are to be welcomed. Like London’s international reputation as a financial centre, its property market is also dependent on the willingness of foreign workers to live and work in the city. The two are inextricably linked.
The decision to double the amount of un-remitted foreign income to £2,000 is especially welcome as this will serve to soften the burden on lower income non-doms who invest in the London’s main and lower end prime market.
Although there are many aspects to the rule changes the principal ones to be introduced on 6 April this year are:
- Non-doms will have to pay an annual charge of £30,000 if they have been resident in the UK for more than seven of the last nine years and wish to use the remittance basis. This will only apply to those over the age of 18.
- In a bid to reduce the impact on less wealthy non-doms the lowest level at which the charge will now apply has been set at £2,000, not £1,000, of unremitted foreign income and gains.
- The Government is nearing agreement with US tax authorities to reduce the possibility of US non-doms based in the UK facing double taxation as a consequence of this charge.
- Untaxed foreign income used to pay interest on mortgages already secured on UK residential property will not be treated as remittances until 5 April 2028.
Our view is that whilst the UK will become marginally less attractive for the super-rich and the not-so-super-rich non-dom, there is little danger of a stampede to sell up. Indeed, there have been recent announcements from major organisations looking to relocate their HQs to London; General Electric recently announced their move from New York, a testament that the game is not up for London just yet.
While there may be some migration of funds and senior employees to other centres, London will continue to be a regarded as Europe's financial capital. As such there will be a continued demand for workers to live here. If there is to be a movement in the property market it is most likely to be among less wealthy non-doms who may now decide that the rental market offers the best prospects for safeguarding their wealth.
We also expect that the main and prime markets may see some convergence in the £2m - £5m price range as less wealthy non-doms adjust to the implications of owning property in this banding. On the other hand we anticipate that property in the super-prime market (£10m+) will remain untroubled by these changes and will continue to see growth.
Indeed our experience so far has been to see a rise in the number of enquiries from potential purchasers of prime and super-prime properties. This is most evident among the younger generation of non-doms who are still developing their wealth and wish to do so from a base if not in, then close to London's thriving global financial community. Their senior counterparts meanwhile may see the rule changes as a prompt for them to pass on their properties to this younger generation and return to their homeland.