1 primeresi.com #Budget2015: Prime property industry reactions to BtL, Non Dom and IHT changes The three big policy announcements for the high-value property industry in today s Emergency Budget were a mixed bag. Abolishing permanent Non Dom status could hit demand from international buyers, but does seem to be a fairly fair thing to do. Upping the Inheritance Tax threshold to 1m was no surprise, but is still very welcome. Cutting the rate of tax relief for buy-to-let landlords is not, however, such a popular move Property Vision s Peter Mackie sums the whole thing up quite nicely, calling it politically charged but ultimately fair. There was, however, a notable absence of anything to push housebuilding or to otherwise tackle the short supply of housing stock; something of a missed opportunity. Here s what the prime property industry thinks of these three policies, as announced by George Osborne in the Emergency Budget 2015: NON DOMS The Chancellor has probably struck the right balance over Non Doms Ed Heaton, Heaton & Partners London is fast becoming a larger scale Monaco, a playground and an attractive destination for the super-rich. There are arguments for and against whether having such a huge international presence in the city really adds significantly to our economy, but on balance, I do think the super-rich really do add value to the UK as a whole. George Osborne needs to ensure that they make a significant enough contribution without taxing them out of the UK altogether. I think the Chancellor has probably struck the right balance today. Changes to Non Dom tax rules will not have profound effect Liam Bailey, Global Head of Research at Knight Frank On their own, the changes to the non-dom tax rules will not have a profound impact on the prime London market as demand is driven by a number of factors, and non-doms form only a part of demand. These reforms follow a series of changes in recent years that make it increasingly difficult to argue prime residential property is under-taxed. The relatively subdued nature of the prime London market since December s stamp duty changes highlights the risk of higher taxation on market demand and also Government revenues.
2 Stricter Non Dom rules will dampen demand from international buyers in central London Nicholas Leeming, Chairman of Jackson-Stops & Staff It is vital that the capital retains its attraction to non doms. The stricter rules being applied to non doms, while having some merit, will inevitably further dampen demand from international buyers in central London where the market for higher valued properties has already slowed sharply following last year s changes in stamp duty. This will affect the London economy, impacting restaurants, clubs and retail in prime central London. Will be viewed as a fair measure, no matter how painful Peter Mackie, Senior Partner at Property Vision The first in two decades, the Chancellor has delivered a politically charged but fair Tory budget. No matter how painful for those involved, the abolishment of permanent non-dom status for those living in the UK for more than 15 years will be viewed as a fair measure. If you choose to remain and contribute to the UK for that long, that should also include contributing to the UK tax system. More could be done to unlock second hand stock now Jeremy Blackburn, Head of Policy at RICS Measures to reassure downsizing baby boomers that they will not be penalised through their Inheritance Tax allowance are welcome, but more could be done to unlock second hand stock now. One such reform might be to incentivise over 60s to downsize now by doubling their Inheritance Tax allowance on sale. Likely to ensure the market remains price sensitive in the short term Lucian Cook, Head of UK Residential Research at Savills The removal of long term non-domicile status and the charging of inheritance tax on residential property held in an offshore structure reflects a further tightening of the tax net on high value properties. Though in itself it is unlikely to undermine the demand for high value homes in London, it is likely to ensure the market remains price sensitive in the short term. It does not necessarily follow that all those caught by this change will divest themselves of their UK property Mark Parkinson, Director, Middleton Advisors The main area likely to effect the prime property segment of the market that Middleton operate in is the abolition of the non-dom tax status. As ever the devil will be in the detail, but it appears to be aimed at second generation nondoms, and those who have been UK residents for more than 15 years. We believe that this will result in some increased supply of stock and vendors price expectations will become more realistic. It does not necessarily follow that all those caught by this change will divest themselves of their UK property. Neither does it necessarily follow that all those caught by this change will leave the UK. Although some tightening of the non-dom rule was expected, the extent of the changes will come as a shock to many and in the short term, probably, the prime property market. Changes will not really affect the super-wealthy Non Doms
3 Brendan Roberts, Aylesford International Before the election, I spoke to several non-dom clients about the threat of changes to the non-dom status. These were people who are older, long established wealthy families, who had been resident in London for many years; their answer was, where else do you go Geneva, Zurich, Monaco? None of the alternative tax friendly locations seemed to present an attractive alternative. Their viewed any changes in non-dom tax as the price of living in London, to them the best city in the world to live in. That said, these are people who can afford to live anywhere. As for the endless chatter about non-doms packing their bags pre-election and waiting to leave I think it s all nonsense. There are those for whom the non-dom status narrowly makes sense because their wealth is only just enough to justify using it, and any change will hurt them most, yet their wealth is not enough to justify relocation. The super wealthy will, I think, react just as our clients did pre-election, believing that there is no real viable alternative to maintain their chosen lifestyle. London still offers tax advantages to wealthy residents that qualify and London has all the advantages, so this change to taxing non-doms will not really affect the super-wealthy non-doms. Lip service to those baying for reform Hugh Wade-Jones, Managing Director of Enness Private Clients Those concerned for the stability of London s property market are probably going to be sleeping easy tonight. As it turns out George Osborne s Budget was a lot less harsh then could have been delivered and many of the changes won t take effect for at least a couple of years. The most pertinent property points that were addressed concerned reduced tax relief for buy to let landlords, a raise of inheritance tax threshold for family homes and a fractional change to the status of non-doms. Regarding the change to the non-dom status there seems to be a sense of making a change for change s sake. People s understanding of the rules surrounding non doms is limited, to say the least, so I suspect George Osborne is paying lip service to those baying for reform. It s unfortunate that some will be caught up in these politics of envy but hopefully an ever flourishing UK PLC will remain a suitably attractive home for them. Unwelcome but not unexpected Charles McDowell The Chancellor s latest announcement on changes to non dom status is unwelcome but not unexpected. We re unlikely to see a fire sale of prime central London property as those affected are likely to have considered and planned for this eventuality. The climate for financial companies is improving, with the reduction in the corporate tax rate, phasing out of the bank levy and the retention of temporary non dom status, which could be beneficial for the prime central London market under 10m which has been very slow over the past year. Inevitable and not entirely unreasonable Mark Pollack, Director at Aston Chase Although the changes to non-dom tax status will inevitably be disappointing to some, my view is that it was inevitable and not entirely unreasonable. Indeed, I suspect a lot of the people affected will have already been making plans in anticipation of this change, so I don t envisage any significant negative impact on the PCL market. INHERITANCE TAX
4 Fair and sensible James Bailey, Chief Executive of Henry & James The best news to come out of today s Budget is undoubtedly the ruling that people will be able to pass on estates worth up to 1m, free of inheritance tax. It s only fair and sensible that people who have worked hard to buy their home, should be able to pass it on to their family. Not that the tax burden has been totally cast off. The Chancellor made it clear that tax-free inheritance would not be available to people whose estates are worth more than 2m. A positive and refreshing move Ed Heaton, Heaton & Partners I think this is a positive and refreshing move by George Osborne. Inheritance tax has been stuck in a time warp for far too long whilst the elderly have increasingly been required to squander their savings and assets in their old age to pay for the failings of the state, which they so generously supported in the past. This goes some way to redressing the balance. The changes to mortgage tax relief for buy-to-let landlords will particularly hit those owning properties in prime central London, where the sums involved are very high and the yields extremely low. Notwithstanding this, if one accepts the Bank of England s arguments, then the proposed changes are probably a proportional response to the issue. It might even help release a little more prime stock in central London to the market in the next year or so, although this might be wishful thinking. More wealth will flow back down the generations rather than into the Treasury coffers Gráinne Gilmore, Head of UK Residential Research at Knight Frank Property trends over the last few decades have led to an amassing of housing wealth among older people. Increasing the Inheritance Tax (IHT) allowance will mean that more of this wealth flows back down the generations rather than into the Treasury coffers. It will give more people the chance to amass a deposit for a new home or make a step up the housing ladder. Making an allowance to protect downsizers is welcome. It means those living in large houses do not have to continue to do so in order to benefit from the IHT changes. This, in time, could help release more large homes back into the market. However, the tapering of the IHT bands upwards over the coming years mean that some may be tempted to sit tight in their home until they can downsize and retain the maximum housing IHT allowance, creating short-term stickiness in this market. The next step for policymakers will be to focus on is delivering housing suitable for downsizers properties in the right location and with the right specifications for older residents. A new downsizing market will emerge Nicholas Leeming, Chairman of Jackson-Stops & Staff The changes in inheritance tax are a step towards encouraging older home owners to downsize and so free up larger properties for families who need more space.
5 A welcome move Glynis Frew, Managing Director of Hunters Property Group We welcome the Chancellor s new inheritance tax thresholds, the last election taught us that home ownership is very important to the nation and when people have worked hard to own a residence and have already paid taxes they should be able to pass this onto their children tax-free. Relief for downsizers is sensible Adam Challis, Head of Residential Research at JLL The new higher rate of inheritance tax relief will provide retirees with greater choice on how to manage the transfer of wealth to younger generations. Sensibly, this relief will be upheld for downsizers, ensuring that it does not slow the release of larger family homes into the market. Pure politics Peter Mackie, Senior Partner at Property Vision Changes in inheritance tax will be viewed by many as pure politics with The Tories delivering their party manifesto promises. The law of unintended consequences could be a further squeeze on transactions as people opt to stay put rather than downsizing. This should mean easier access to the property market for many Nick Barnes, Head of Research at Chestertons Changes to inheritance tax are welcome, as for most people the family home is the main source of equity, and previously many average households, especially across London, have typically suffered a 40% reduction in their inheritance largely because of inflated residential property prices. This change should allow people to leave a more substantial legacy to their loved ones, which will mean easier access to the property market for many. Downsizing is critical to the efficient use of our housing stock Lucian Cook, Head of UK Residential Research at Savills The plan to increase the inheritance tax threshold will be of the greatest benefit to mature homeowners in London and its hinterland. While many older homeowners will welcome the changes to inheritance tax, the downside could be to encourage those in the high value areas to continue to hold onto their homes for longer, irrespective of the ability for downsizers to carry forward the increased inheritance tax allowance. Downsizing is critical to the efficient use of our housing stock and recycling housing wealth between generations, which is an important means of helping younger households get on or trade up the housing ladder. A sensible proposal Martin Bikhit, Managing Director of Kay & Co The Chancellor s move to raise the Inheritance tax allowance to 1m is a sensible proposal given the huge appreciation in property prices. The average property price in Prime Central London now stands at 2,080,742, so this is a far more sensible threshold.
6 A positive signpost for lasting home ownership Hugh Wade-Jones, Managing Director of Enness Private Clients The inheritance tax manifesto has been high up on the hit list of the Conservatives for years and is, undoubtedly, a positive signpost for lasting home ownership and a sense of continuity in the vein of one-nation Toryism. BUY-TO-LET Not as bad as it might have been Adrian Anderson, Director of Anderson Harris There had been growing fears among landlords that relief on mortgage interest payments for buy-to-let landlords would be completely abolished so while the changes will hit higher-rate taxpayers, it is not as bad as it might have been. It is only fair that there is a more level playing field between first-time buyers and landlords but if this tax break had been completely withdrawn, buy-to-let would have been far less attractive to investors. Thousands of landlords may well have struggled to keep up repayments on their mortgage or struggle to pay the tax, especially when interest rates rise. It is too simplistic to blame landlords snapping up rental properties for the property shortage. People have to live somewhere, and if they can t afford to buy, then they must rent. With many first-time buyers struggling to get on the property ladder and growing families unable to find the housing they need, housebuilding should be at the centre of the Government s strategy so we look forward to see what further planning reforms are proposed. Detailed plans are required as to how effective changes will be achieved. The UK remains a pretty reasonable tax jurisdiction in which to live Mark Harris, Chief Executive of SPF Private Clients Changes to mortgage interest relief for buy-to-let is inevitably going to slow down investment in property because this tax break has been one of its biggest attractions. It puts everyone on a level playing field basic and higher rate taxpayers, which is fair. It will inevitably slow down geared investment. If you are a genuine cash buyer, it won t make any difference to you and it probably won t make any difference to overseas investors in London but if you are looking to leverage with a mortgage, as most people do, it is a kick in the teeth for the higher-rate taxpayer. However, the arguments in favour of buy-to-let remain. If you are looking for good long-term growth then that will still be the case and you have a couple of years to get used to the changes, which makes it less painful. It will mean a shift for house builders who will become more reliant on owner-occupiers than investors so it will keep more of a lid on house prices. The UK remains a pretty reasonable tax jurisdiction in which to live. The reduction in tax breaks for landlords will reduce the amount of rental stick and push rents up Graham Davidson, Managing Director of Sequre Property Investment
7 Despite a phased approach, the reduction in tax breaks for landlords will make buy-to-let a much less attractive proposition, ultimately discouraging investment in the sector and reducing the amount of rental stock available, which will push rents up. As per Labour s proposed rental caps and controls, this is another example of politicians not understanding how the market operates, directly contradicting their apparent goals for an improved private rented sector. Landlords should be free to deduct legitimate costs, just like any other business does. A major blow Nicholas Leeming, Chairman of Jackson-Stops & Staff This a major blow to a sector that is heavily reliant on private investors and who provide a crucial supply of property to the private rental sector. A significant change that could put upward pressure on rents Gráinne Gilmore, Head of UK Residential Research at Knight Frank This is a significant change in tax status for those with a rental portfolio, although the measured rate of introduction between 2017 and 2020 will help landlords plan their approach. Those planning to purchase a buy-to-let property will have to factor these new rules into their calculations, and this could affect the offers they are willing to make. If the relatively low yield environment seen today, especially in the South of England, is still evident when these changes start to come into force, there could be upward pressure on rents. The need for rental accommodation is strong, and we expect this trend to continue, especially in city centre markets around the UK. We are not expecting an adverse effect Peter Mackie, Senior Partner at Property Vision Restrictions on buy-to-let tax relief could create an anomaly with landlords looking to recoup the cost by increasing rents but we will have to see whether the rental market is strong enough to support any further rental price rises. We are not expecting this to have an adverse effect on the buy-to-let market or the overall appeal of investing in the property market. Will inevitably lead to higher rents Glynis Frew, Managing Director of Hunters Property Group Despite a phased approach, we were disappointed to hear of the reduction in tax breaks for buy to let investors as this will discourage new landlords from entering the sector and will result in a lack of stock. This will inevitably lead to higher rents as at the end of the day landlords are business people and will need to compensate for this. May result in landlords simply putting rents up Matt Cobb, Director at Hatton Real Estate Landlords are going to take a hit over time with mortgage interest tax relief being phased out over four years however
8 this may result in landlords simply putting rents up. Overall, I don t believe that the budget will have any significant impact on house prices as demand remains strong and supply limited. Likely to weaken demand for new-builds Adam Challis, Head of Residential Research at JLL The loss of some Buy to Let interest relief will curb the expansion of investment in the sector. Although this will be seen as a boost for first-time buyers, it is only likely to weaken demand, particularly for new-build product. This investor activity is vital to underpin construction finance and will run counter to the need for higher rates of new supply. Likely to make the rental market less attractive to investors Martin Bikhit, Managing Director of Kay & Co The Chancellor s intention to restrict mortgage interest relief on residential property to the basic rate of income tax from April 2017, phased in over four years, is likely to make the rental market less attractive to buy-to-let investors in a market where an increasing number of people rent homes, which may push up rents for tenants as supply decreases. Investors may look elsewhere Shane Ballard, Lettings Director at Greene & Co The Government s announcement in today s budget that mortgage interest rate tax relief for buy-to-let homebuyers is to be restricted to the basic rate of income tax, could see some far reaching consequences once brought into effect. We may find that potential landlords look to alternative, more profitable investment options, and in particular this could affect individual retirement planning as expected profits from their buy-to-let portfolio fall. Areas which return high rental yields could become increasingly competitive while other areas where the rental yield is much lower may see a fall in demand from landlords as they no longer see it as a worthwhile investment. Will have a limited impact on the mortgage or property markets Hugh Wade-Jones, Managing Director of Enness Private Clients The changes to the tax reliefs that buy to let landlords enjoy will have a limited impact on the mortgage or property markets. These are proportionate softening reforms, unlikely to mature until 2017, which are not going to deter any buy to let landlords from bolstering their portfolios. It s important to remember that these tax reliefs are just one of the many costs surrounding owning and maintaining buy to let property that can be offset against tax. Those landlords heavily geared and relying on offsetting every last penny are a thing of a the pre-crash era. We hope the government is not too quick to dismiss the rental sector as a valuable tenure option Jennet Siebrits, Head of Residential Research at CBRE We believe that landlords across the country offer a service to tenants and should therefore be entitled to offset their interest payments as other service operators are able to do. While we are encouraged that the Chancellor ensured that landlords would be eligible to receive the basic rate tax relief, it may still lead to an upward pressure in rental prices for the general consumer. In a growing and much needed private rental sector, it is of significant importance that the Government further promotes institutional investment to support this increasing market. Any mention of build
9 to rent was sadly missing and we hope the Government with unwavering support for home ownerships isn t too quick to dismiss the rental sector as a valuable tenure option. We are disappointed that the Chancellor did not use this Budget as an opportunity to drive much needed housebuilding growth across the UK. We look forward to the Planning Reform Proposals which will be delivered on Friday and we hope will be designed to address this issue which is felt right across the country. Cartoon by George Leigh