What Can Medway Investors Expect From Rachel Reeves' 'Bombshell' Budget?

Hello Readers,

It's budget week! There’s a huge amount of speculation as to what it could include and I thought I’d pick out some of the key areas I’ve spotted that might affect landlords.

We’ll go straight in!

Capital gains tax

I have read that Rachel Reeves is reportedly considering making capital gains tax for shares equal to that of property. At present, shares are taxed considerably less than property, so by bringing them in line, she hopes to raise more revenues.

I have read reports that a growing number of business owners are considering leaving the UK (because overseas residents can sell with no CGT so long as they do not return within five years) over these proposals and also how there has been a huge surge in shares being disposed of, doubling post election. Check out the graph below:

Thankfully for property investors, this will mean that no increase to CGT will be paid upon disposal of property and the reason for this I read was due to reports from a think tank where no additional tax will be raised as people simply won't sell.

Inheritance tax

Inheritance tax (IHT) is expected to rise, with the government potentially increasing the rate or lowering the tax-free threshold (currently ￡325,000, known as the nil-rate band).

This is an interesting one as I personally don't think they will change the headline rate or threshold, but I guess expecting the unexpected is what we should be doing!

Currently, IHT is 40% on estates above this threshold. Another possibility is a "double death tax," where both Capital Gains Tax (CGT) and IHT are imposed when passing on assets.

This would mean, instead of just IHT, CGT could also be applied, raising the total tax rate on inherited assets to as much as 54%.

At the moment, there is a rule whereby people have to survive at least seven years before inheritance tax applies, however I have also read proposals that this may change to ten years. I believe there will be a tapered amount of relief as this policy is introduced.

The problem for businesses here comes when passing onto a company to the next generation and I have read that as much as a fifth were now looking to speed up an exit due to a potential cut in inheritance tax relief, as it could quickly become more expensive to pass on.

Stamp duty

I'm not sure if this will hit in the budget myself, but during my research it came up that Labour has indicated plans to reduce the tax free threshold from ￡425,000 back to ￡300,000 at some point before the next election. Pretty daft if you ask me, particularly when Labour wants to promote home ownership!

I have also read about proposals to increase the surcharge paid by non-UK residents to from 2% to 3%.

Dividends

I have read some articles commenting that the Chancellor is considering changes to how dividend income is taxed. Another kick in the teeth to ambition if you ask me:

• Lowering the tax-free dividend allowance, which is now ￡500, down from ￡2,000 in 2022-23.
• Raising the current dividend tax rates, which are 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for those in the additional rate band.
• Treating dividends as regular income, which would subject them to the same tax rates as wages.

Pensions and Employers National Insurance

Another one that Labour are likely to change is pensions and this links to National Insurance. Several options I have read that the government may consider include:

• Implementing a flat rate of tax relief on pension contributions, possibly set at 20%, 25%, or 30%
• Introducing employer National Insurance contributions on pension contributions
• Reducing the tax-free amount individuals can withdraw from their pension pots. The FT reports that this could reduce from 25% to ￡100k and there has been a surge in withdrawals from those with larger pots.
• Increasing employers national insurance by around 2% to 15%. This has come in for strong criticism for potentially breaking an election pledge

Interestingly, if a flat rate of 30% tax relief was introduced on pension contributions, the basic rate taxpayer would be better off with an additional 5% relief as currently they get 25%.

On an increase to employers national insurance, this is certainly a worrying situation for small businesses!

Council tax

Another rumour flying around is a shake up of council tax with a shake up of bands and re-evaluation of properties and introduction of new bands to make payments fairer.

Other articles talk about possibly removing the single person discount and allowing councils to continue raising payments by 5% per year (despite inflation falling).

I have also read about how 'The Fairer Share' campaign group has put forward a proposal to replace council tax with a new system.

Their suggestion is to eliminate council tax and similar levies, introducing instead a flat tax of 0.48% based on the current market value of a property. This tax would apply exclusively to homeowners (so, landlords), leaving tenants unaffected - apart from the increased rent to cover the cost of course!

Personally, I think it's quite unlikely that any change to the way council tax is paid and I have read that this has been ruled out, but we shall see.

EPC targets

You will undoubtedly be aware of the proposed EPC changes for rental property, where from 2030 all privately rented homes will need to have a minimum ‘C’ grade, with a ￡10,000 cost cap on the next possible improvement.

The problem with this is that there is no certainty and no final decision having been made. Landlords don’t even know if it will actually happen, so perhaps the budget will shed more light on this.

Is property still worth it?

You could be forgiven for thinking that, with all the changes that are happening (and have happened), property is no longer worth it and for some, depending on the structure of investment and tax law changes, more consideration to this point would be given.

For properties held within a limited company, the cashflow (today) that is generated and accessibility of funds is not something a pension can offer. In addition, you are able to build wealth that can fairly easily be passed on and your investment will remain strong even in economic downturns.

It's certainly all dependant on individual circumstances, but as well as a strong investment and income even in economic downturns, this only gets stronger as time passes.

Whilst we all wait with bated breath, expecting the unexpected, my conclusion is that property remains an excellent part of a balanced investment strategy.

Got thoughts on what we might see? Drop me a message as I’ll be keen to hear from you!

Hasan