“The trouble with socialism is that eventually you run out of other’s people’s money”.
Baroness Thatcher.
Whilst Baroness Thatcher's views may be divisive, the spectre of Old Labour appears to have raised its head, with a huge tax and spend budget for what appears to be very limited growth. You will have seen the headlines and formed your own views. We do not propose to go over each detail, but rather seek to examine the elements which will affect our Market (and some taxes we think are just crackers)
As we listened to the Budget we were watching the yield on Gilts. At the start of the Statement, the 5 year was 4.165%; 10 year 4.248% and the 30 year 4.779%. As we write this, the 5 year is trading at 4.37%, the 10 year at 4.50% and 30 year at 4.94%. The budget has increased the UK’s cost of borrowing. Why? Simply put, the Chancellor has committed to very substantial capital expenditure funded by tax and higher borrowings but forecast GDP growth has remained broadly the same as it was in March 2024.This has caused concern in the bond market. Notably the OBR maintains GDP growth is expected to slow in 2027 which suggests the Chancellor may need to borrow more than she has forecast: and when interviewed by Beth Rigby , the Chancellor refused to rule out further tax rises.
Some of the areas the Chancellor has chosen to penalise (sorry – tax) are odd given the little they raise. We understand (but will not enjoy) an increase to employer NIC (although the IFS is saying that this will not raise the £25bn she anticipated) but honestly taxes over this parliament on Private School Fees (£6.76bn) , Farms (£1.76bn), Carried Interest (£310m), will raise tiddlywinks versus the size of the UK economy which is around £2.2 Trillion. This was, in our opinion, a budget driven in these sectors by ideology, penalising those they simply did not need to tax or tax further. These figures were taken from the Autumn Budget and are contested by many – the Non-Dom figure particularly (£13.35bn) is a complete guess as their capital is mobile and the fact the Chancellor is seeking to tax offshore settlor trusts for both decennial tax (6%) and IHT will likely lead to a queue at the far end of Terminal 5.
Farmers have our full sympathy: the Knight Frank Farmland Index recorded an average price for arable land in England at £9,335 per acre in Q2 of 2024. Therefore, a small 250 acre farm would be worth £2.3m and is now caught in the new IHT net, with a potential tax of £266,000. According to Strutt’s, the expected profit for the 2024 harvest is £103.20 per acre or in the case of this example £25,800. This is of course less than the annual demand to pay the proposed 10 year instalments for IHT, in this example, of £26,600. Absolutely crackers (and even Ed Balls says so!)
The same for Private Equity: the tax raised by changing the carried interest regime is estimated, over this parliament, to be £310m (a rounding error for UK PLC) by increasing the CGT to 32% and then changing it to income tax with a proposed National Insurance charge of 2%, taking it to over 34%. The trickle-down economic effect of the PE and VC industries in the UK is substantial and apparently ignored by the Chancellor. According to the BVCA, in 2023 suppliers to the PE and VC backed businesses employed 1.3m people, earning £49bn and generating £88bn of GDP. If the PE industry were to decide that 34% was too high and leave, what would happen? And if carried interest is treated as income, who pays the Employer National Insurance Contributions? Why risk this industry that contribute so heavily to the economy for …£310m. Again, absolutely crackers.
The arguments for VAT on School Fees is also crackers and litigation has started, as expected.
For property, we see little change to domestic buyers in our market. Foreign buyers may decide to rent rather than buy (because of the new resident regime taking their worldwide income and assets into the UK tax net) but we believe the effect of the increase in SDLT for second homes will be small and ultimately result in a small drop in prices to reflect the new charge. Buy to Let investors however may seek alternative assets to invest in, leading to little or no growth in the size of the private rental market. The current shortage of housing is unlikely to be alleviated by new build in the medium term so this when combined with the forecast of 9.9% increase in population over the next decade(ONS), we believe will result in a tighter rental market going forward.
Although the OBR expects mortgage rates to rise from around 3.7% to a peak of 4.5% in 2027, because we deal with mainly cash buyers, our market is somewhat less affected by these projected increases, but time will tell what pricing will do. We still have buyers interested (we agreed a sale during the budget speech!) and tenants are now looking to rent, so please call Jamie for Sales or Peter for Lettings for current market colour. We honestly expect some the above “crackers” taxes to be watered down once the Chancellor realises that they will cost the public purse more than they raise. For Maskells, it is business as usual.
Charles Curran
Managing Director
Maskells