Is Property Still a Safe Bet?

I would be a wealthy individual if I could predict the future, particularly concerning the property market. Common sense tells me that, although there are bound to be some eye-catching headlines, Rt Hon Rachel Reeves possesses a shrewd and sensible financial head. She honed her skills at 英国牛津大学 and then at the 英国伦敦政治经济学院 , where she attained a master's degree in economics, followed by positions at the Bank of England and HBOS, prior to entering the political arena.

There are many who fear more left-wing leanings after feeling battered and bruised by the last few years of populist landlord criticism. They are likely to be concerned that they may become an easy target for the new administration. It is true that we are likely to see changes to Capital Gains Tax (CGT), Inheritance Tax (IHT), and pensions, as it has been made clear that reviews of Income Tax and National Insurance are not on the table this time around. There has also been considerable discussion about closing tax loopholes that benefit non-domicile residents. However, growth is the rallying cry of this government, so they will need to balance any changes with their desire to keep Britain spending and ensure that our predominantly service-based economy moves in the right direction. It is always much easier to be idealistic in opposition than to deal with the real-world implications of implementing what might seem like the “right thing to do” once in power. Actions have consequences, and sometimes what seems like a principled move might create the opposite result from what is intended. If all the wealth leaves the country, there may be no one left to tax!

Regarding CGT and landlords, the government's focus should not directly be on income, as taxes are only levied on profits. Therefore, you will not pay any tax if your asset (in this case, property) has not increased in value beyond any personal allowances. The current CGT rates are 18% and 24% on residential investment property, depending on whether you are a basic or higher-rate taxpayer. If you hold these assets through a limited company, you would pay corporation tax rates based on the value. However, there are potential ways to mitigate some of this with professional tax advice.

If these tax rates do rise following the budget announcement, it may only be a short-term increase to address a temporary shortfall. A balancing act must be maintained between balancing the books and not disincentivising landlords and company owners when the country desperately needs a healthy and affordable rental property sector. If landlords are scared into disposing of their portfolios, this could well have the opposite effect. Higher rental costs or a housing crisis due to fluctuations in supply and demand would not be welcomed by the new government, particularly among their traditional voter base.

When it comes to property, for most people, it is a medium- to long-term investment, and capital growth is not the only way of seeing a return. Many are looking for income or aiming to build a portfolio, so the short-term changes to non-income-related taxes implemented by the government may have little bearing on their plans, assuming that disposing of property assets is not on their short- to medium-term timeline. For some, investment is intended for their children or grandchildren, making effective IHT planning and mitigation more immediate considerations.

No one apart from Rachel Reeves and perhaps Keir Starmer knows exactly what we are in for in the upcoming budget, but it seems that it might not be as brutal as some initially feared. In economics, when the rules do not help you, sometimes you need to change the rules, and I believe this is exactly what might happen here. Other countries calculate government debt differently and distinguish investment in infrastructure from tax giveaways. This means that through clever accounting and some re-drawing of lines, Rachel Reeves may be able to perform a bit of magic to allocate more funds to projects that foster growth without significantly burdening the wealthy. It may take some artful positioning to keep everyone satisfied, but if she can succeed, the left may feel there is indeed a stable plan for addressing key areas such as health and education, while those with broader shoulders are called upon to undertake more fiscal responsibilities. For those who are essential contributors to the UK economy, they may find that the burden is not as heavy as they initially feared. For all our sakes, I hope I am correct!

One thing I am reasonably confident about—given the current geopolitical turmoil and the rise of populist political posturing—is that we are entering a new upward-moving housing cycle. More and more indicators are supporting this notion. Combined with more affordable mortgage finance, both residential and Buy to Let, and significant wage growth, this trend is likely to accelerate.

This continues to make property a sound investment for many, in my opinion. With the right advice on financing and related tax planning, there can still be a very healthy return from property over the medium to longer term.

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Author:

James Keable

Financial Services Director, CAPITAL PRIVATE FINANCE LIMITED