Fiscal & Regulatory Outlook
Summer 2014

The UK budget for 2014, which was announced last March, has brought about a few changes for the property market, some welcome, some not. The extension of the Help to Buy Equity Loan until 2020 is helping developers plan more extensive, sizeable projects and should continue to bolster development in the capital and an increased trust in the market globally.

Following the introduction, in 2012, of a 15% Stamp Duty Land Tax (STDL) on purchases of £2m+ properties by a company, with this latest budget the government has continued to discourage the ownership of residential property by companies. The £2m+ threshold was lowered to include any properties valued over £500k. Since 20 March 2014, companies seeking to purchase property in this new bracket have had to pay the 15% STDL, unless they are property investors or developers.

The second item to have affected the property market was the extension of the Annual Tax on Enveloped Dwellings (ATED), also introduced in 2012, to properties over £500k owned by a company. The budget introduced two new bands: one for properties valued between £500k and £1m, and a second for properties valued between £1m and £2m. The ATED rates for these bands are £3,500 (commencing April 2016) and £7,000 (commencing April 2015) respectively.

In addition to these changes, the budget also stipulated that as from April 2015, non-residents will have to pay a UK Capital Gains Tax (CGT) when selling any residential properties in the UK. This will bring the UK in line with many other countries in this regard. The tax will only apply to future gains, but will apply to all residential properties, whether buy-to-lets or owner-occupied properties. The CGT does not affect commercial properties. A consultation paper providing more detailed information on the affects of the CGT on non-residents was published on 28 March 2014.

It is clear from this consultation paper that the proposed CGT changes would also affect UK residents. The government is proposing to remove the right to choose a principal residence in order to benefit from the CGT exemption. According to Mishcon de Reya, an international law firm with offices in London and New York, this change would affect anyone who has more than one home, whether additional homes are in the UK or outside of it. Previously, CGT was paid only on profits from sales of properties which were not the principal residence. Now the period in which property owners can sell their main home after moving out, without paying CGT, has been reduced from three years to 18 months. This means those property owners with more than one home, whether additional homes are owned or rented, may need to plan ahead.

With regards to interest rates, after much speculation, the Bank of England announced after a unanimous vote during its Monetary Policy Committee meeting in early July, interest rates would remain unchanged at 0.5%. However, according to This Is Money.co.uk, during a recent speech in Glasgow, governor Mark Carney again said, as has been expected, interest rates will have to rise in the near future as the UK economy gets back to pre-recession levels. The UK’s GDP is now higher than its peak levels pre-crisis.

The governor’s aim is no doubt to keep the cost of credit low in the midst of global political uncertainty, whilst also trying to avoid a housing bubble in the UK. An interest rate rise would negatively impact UK households, many of whom are highly indebted, particularly as wages have been slow to catch up with increasing house prices and real incomes have declined due to inflation. Rising interest rates could cause households to cut spending and risk plunging the country back into recession. According to This Is Money.co.uk, Carney’s warnings on future interest rate rises and the levels of household debt may simply be his way of encouraging households to act more carefully. If this is the case, the rate rise may not actually happen until quarter two 2015, though some analysts believe it will happen by the end of 2014, or quarter one 2015 at the latest. The Bank’s Inflation Report due in August will be the next key indicator of changes to come.

• Mishcon de Reya Law Firm, Implementing a capital gains tax charge on non-residents, 19 June 2014;
• Mishcon de Reya Law Firm, Tax Aware, 20 June 2014;
• This is Money.co.uk, Is Mark Carney trying to nudge nation into behaving more cautiously?, by Alex Brummer, 23 July 2014;
• This is Money.co.uk, No shock rise in interest rates on the cards as Carney shifts ‘forward guidance’ focus on to weak wage growth, by Adrian Lowery, 23 July 2014.