It’s certainly been a month to remember. Abroad there is Trump, and the still being digested implications of his re-injection into international affairs. The one thing everyone seems to agree on is that he portends inflation. At home there is the first budget of the new Labour government that was billed as the ‘big bazooka’ and anticipated with dread by those with money and property. While companies have been hit hard on many levels, most rich people have breathed a sigh of relief that it wasn’t as bad as many, probably most, feared. Non-Doms and farmers might quarrel with this, but with a Labour government there can’t be many who thought wealth would escape unscathed.
A big headline grabber was the proposal to levy inheritance tax on farms and family businesses that had up until this month enjoyed Agricultural and Business property relief. Now 20% will be levied on the value of an estate valued above £1m, a figure that is a lot lower than the value of almost any viable family farm. What has been left out of much of the commentary is the implication of the word ‘family’. If it is a husband and wife team, then both of the couple have a £1m APR/BPR allowance which can be combined with each of their nil rate bands of £500,000 (assuming they don't have total estates of more than £2m) to become £3m. And that commentary also forgets that the option of a Potentially Exempt Transfer (PET) is still there. If a farm or business is handed over during the lifetime of the donor and the donor lives another seven years, then no inheritance tax is payable. It’s a bit more complicated and requires some planning and this route won’t be available to elderly widowed farmers who have only a small chance of living seven years - but maybe an adjustment to reflect that will be the sweetener in the final legislation? Or raising the allowance to £5m?
The targets in all this were, presumably, the wealthy using farmland as an IHT avoidance scheme. Instead, the Government has managed to alienate working farmers who were told before the election that APR was safe. These true farmers are operating on the thinnest of margins and, while asset rich, most are getting by on incomes that bear no relationship to the work they put in and conditions under which they labour. IHT avoidance has driven farmland prices to a level that no farming return can justify - so lower land prices will be a likely outcome though it will still be the case that big farms will continue to swallow the smaller ones - which will put some sort of floor under the market.
Non-Doms received a kicking - but that kicking has been going on for a long time under a Conservative government. The details don’t need elaborating but the main effect, and the thing that we are hearing is hurting the most, is not the taxation of worldwide income but the Inheritance Tax net being thrown over the world-wide assets and looking through offshore trusts. It is seen by those about to be caught by it as inequitable as these are assets earned, taxed and paid for outside Britain, and the final straw for many. How many this involves, nobody seems to know with any accuracy, though common sense would suggest that there will more sellers and less buyers from this cohort over the next few years. This is hardly an announcement of a Britain that welcomes international entrepreneurs and capital - with long-term consequences - but as an immediate game changer it looks to be so only at the margins.
Stamp Duty, that tax that chancellors can’t look at without increasing, was once again raised for second homes, the surcharge increased from 3% to 5%. As most of our clients have more than one property they are in the crosshairs. Its effect? Probably to bring down prices slightly as it will be absorbed in the selling price. The threshold for stamp duty was reduced at the same time - an odd move as it makes it even more difficult for first-time buyers who are hardly the rich with the ‘broadest shoulders’. What was disappointing was that there was no acknowledgment that property taxes in the UK are a mess. The Chancellor chose to focus on Stamp Duty - which is a tax on mobility - and surely a tax therefore on growth, the Government’s mantra? There was no mention of a revaluation for Council Tax where the current system throws up anomalies like £1300 a year for a mansion in Belgravia and twice that for a terraced house in Manchester. Predictable, unimaginative, and disappointing are the adjectives that come to mind - especially as they have had a long time to come up with something more constructive. But maybe that will come in subsequent budgets?
The private equity industry breathed a sigh of relief. The Capital Gains Tax (CGT) on carried interest has increased from 28% to 32% which is within the range of that within competing regimes in Europe and the US. Many of those that had packed their bags in anticipation of worse are now unpacking them (but at the same time probably taking a good look at their Non-Dom status). CGT was increased, but not, as many feared to match Income Tax. Again, the reality was less bad than the anticipation and again, probably not a game-changer but not exactly pro-business either. The CGT increase is just the latest nail in the Buy-to-Let Landlord’s coffin. Expect rents to increase as the supply of rental property dwindles further.
The budget was noticeable as much for what it didn’t effect as much as what it did. On inheritance tax, as we noted above, Potentially Exempt Transfers remain. The taxation of trusts stayed at the same rate. The major taxes (apart from employer's National Insurance Contributions) were unaffected. But for how long? With the pressures on public services and the thinnest margin for error, the Prime Minister’s claim that this was a one off, all the pain at once, budget seems a bit thin. Having boxed herself in with her promises not to raise any of the major taxes, the Chancellor was forced into a predictable stealth tax on employer’s National Insurance Contributions. Next time, if everything doesn’t work out as planned, what will be next? Recent history would suggest that betting on the plan is not the way to go.
In our market there was an anticipation of a flood of properties onto the market, particularly in the smarter boroughs of London, as Non-Doms and private equity bros cashed in their chips. We have seen no evidence of this - yet. Many Non-Doms have already gone, and even if they have gone – or are going - to warmer climes and more welcoming tax regimes, they don’t necessarily have to sell their houses. Our international partners report an uptick in Non-Dom enquiries particularly in Switzerland and Italy - but also in Spain, Portugal, France and Greece for those looking for a second home. But this is not a flood - again, yet.
If one is looking for a silver lining, the budget is now history and a normal market can resume - one where buyers and sellers can get on with their lives without having to second guess what bombshells the Chancellor might have in store. Everyone is a bit poorer and no one is that happy - but that’s life.
