What does the spring budget announcement mean to property investors?
Blog By:
Jacob Ragan
Investment Specialist Northern Property Partners
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Overall, the Spring 2023 budget announcement was a positive step forward with inflation set to reduce over the coming year, and longer-term Gross Development Product (GDP) is forecast to grow as well as the lowering of interest rates. These forecasts along with the proposed fiscal policy will hopefully steer the country clear of a recession. Although, time will tell whether Jeremy’s rosy outlook will come off!
What were the main announcements and what do they mean to property investors?
Freezing of tax thresholds:
The tax Thresholds have been frozen. Income tax thresholds and rates for 2022/2023 are expected to remain the same until 2026 Coupled with the freeze, it is anticipated that wages will rise at a faster pace due to high levels of inflation and low levels of unemployment (thanks to the recent childcare changes) This is certainly something to keep an eye on if you are building your portfolio in your own name and not a limited company as a growing income from your portfolio and potential increases to working wages could potentially mean you end up in a higher tax bracket. Even with changes to corporation tax, this strengthens the case to buy and build a portfolio though an SPV or Ltd company.
Increasing corporation tax (19% - 25%):
This obviously isn’t great news for business owners and seem like quite a large rise, however with the freezing of current income tax thresholds, it still makes much more sense for an investor to build their portfolio within a Ltd company, certainly if their plan is to leverage cashflow and appreciation to grow the portfolio further.
Full expensing of investments for companies:
One announcement that will be welcomed by Ltd business owners the ‘full expensing’ of investments for companies. This is a continuation of the super deduction that has been in place for the last few years following Covid, where companies could claim 130% capital allowances. This has now been reduced to 100% but is a step to push business’ to reinvest their profits and kick start the economy. It certainly doesn’t mean you can purchase your new Ferrari through the company. However, this could potentially mean items such as laptops, work equipment and vans etc may be able to be deducted from payable tax. If this is something you have not already taken advantage of, the continuation of this, although it has reduced, could be a great away of offsetting the corporation tax increase if you have legitimate expenses. Another strong ‘tick in the box’ for anyone unsure of whether to purchase property in their own name or limited company.
Energy price guarantee:
Great news for HMO and SA landlords (for the next 3 months anyway). The cap on energy bills will be welcomed, even if it is only for the next few months. It is still very important for landlords to monitor the energy usage. We will see how this progresses, following this 3 month period.
‘New money’ in the economy:
The government announced additional spending in the form of a top up to childcare support. This will help parents get back into work and in effect increase the flow of money into the economy. This will certainly go a long way to help families who make the difficult choice between work and childcare. Ultimately, new money in the economy leads to increased spending and more people back in work which should increase productivity. Whilst in isolation, this announcement will not have a major effect, it is important to point out that on the whole, more money being released into the economy will slowly devalue the pound. Again, another reason why owning assets are so important.
Lowering of interest rates:
This is a contentious subject for investor. In the short-term higher interest rates ate away at potential ROI in the here and now but certainly aided in the dip in house prices that we have seen over the last 6 months. Investors have recently managed to grab themselves a BMV investment, albeit with a higher interest rate. Those savvy enough to buy in the last 6 months, on a variable rate tracker mortgage will relish, the potential drop-in rates as their investment returns increase.
What could the lowering of interest rates mean in the next 12-18months for property investors?
- There will likely be an influx of new buyers and competition in the market for investments as investors aim to take advantage of the lower rates
- More residential buyers may enter the market adding to the competition, looking to take advantage of the rare period where purchase prices and interest rates may seem low
- This won’t last for long as house prices may start to creep up due to increased buyer demand.
- Lower interest rates generally mean more lending, leading to more money in circulation and the further devaluation of the pound.
- If interest rates do drop and more borrowing occurs, this could impact the rise of inflation in the coming years but for this year inflation looks like it will reduce.
- Lowering inflation typically sees investors flood into assets as their banks pay less and less favourable rates and inflation, even though lower than it has been, continues to erode the purchasing power of money.
To me, this is a huge buy signal for anyone with capital, sat on the fence as to whether they should invest in property. Knowing interest rates will likely fall and lead to more market demand. It seems like the opportune time to catch yourself a bargain and wait it out for your interest only tracker mortgage to drop.
Changes to pension limits
The budget abolishes the existing £1.07 million lifetime limit on pension savings and increases the annual limit on pension saving from £40k to £60k for most people. There will be no limit on the size of the pension pot that can accumulated without a tax penalty, however, the tax-free 25% will continue to apply to the first £1.07 million of pension savings. This will certainly benefit those building their pension pot with the view to investing in property through a SAAS.
New Investment Zones
Out of the whole budget, the announcement that excited me the most, is the proposed investment in the North of England. Out of these zones, 5 of them are areas in which NPP operate and already show evidence of future potential growth (NPP investment areas in bold below):
- East Midlands
- Greater Manchester
- Liverpool City
- Northeast
- South Yorkshire
- Tees Valley
- West Midlands
- West Yorkshire
This adds to the outlook in these areas and strengthens NPP’s initial view on the future growth of these areas. Each English investment zone will have access to interventions worth £80m over five years, including tax reliefs and grant funding.
Speak with a member of our team to help understand what these changes mean for you and to build a strategy moving forward
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Sources Used
- https://www.gov.uk/government/publications/spring-budget-2023/spring-budget-2023-html
- https://commonslibrary.parliament.uk/research-briefings/cbp-9748/
- https://www.instituteforgovernment.org.uk/comment/jeremy-hunt-spring-budget-2023
- https://www.mortgagesolutions.co.uk/news/2023/03/16/spring-budget-2023-all-the-key-announcements-at-a-glance/
