David Baybut, partner in the commercial property team:
The buy-to-let market has been booming. This has been concerning the Bank of England. Concern is derived around what will happen if interest rates rise ahead of income. If this was to occur we are likely to see repossessions increase and negative effects for the economy. This budget is seeking to address this with the reduction of tax breaks, making buy-to-let a less attractive option to owners. If buy-to-let is less attractive, it may assist first time buyers by giving them more stock to look at and buy.
This may also be good news for social housing. If there is less competition from private investors to buy affordable houses, to let, additional stock may be exposed to the social housing market, to replenish their portfolios. Equally, this may well be welcomed as demand may increase due to other benefit cuts affecting low income families.
The Rent a Room scheme tax break has increased to the £7,000 threshold from £4,250. At first glance this looks positive, however we question whether this will really assist in the areas where it is needed the most. It will in reality only assist a small number of households in affluent areas where a room tax of £7,000 can be achieved.
Although good news for Mr Rigsby our scrupulous London landlord renting out rooms in his house, it is possibly more bad news for the social housing market. Rents in the social housing sector will be reduced by 1 per cent a year for the next four years and subsidies will be phased out for local authority and housing association tenants in England who earn more than £30,000 or £40,000 in London.
This may push the higher earning renting group in to the private sector rental market, or drive down rents achievable by registered providers. Generating less income for social housing providers and putting them under more financial pressure. Though the former may alleviate a stock shortage issue for some providers.
Louise Hebborn, partner in the commercial law team:
George Osbourne’s first fully Conservative budget has very little specifically related to commercial law. Although there are several points of interest for commercial lawyers. Insurance premium tax will rise to 9.5 per cent from November of this year. This will impact all businesses.
The budget has introduced an apprenticeship levy on all large firms, which will inevitably effect all law firms and businesses alike.
A surprise was the cut in tax for corporate profits, which are to be cut to 19 per cent by 2017 and 18 per cent by 2020. Leading to businesses being better off by 2017.
The biggest surprise relates to the introduction of a restriction on mortgage interest relief for buy-to-let landlords. Presently, buy-to-let landlords can offset interest payments against annual rental income. Many landlord businesses centre upon this. The Government perceives that buy-to-let landlords have an unfair advantage over first-time buyers and the changes have been introduced to reflect upon this. The budget looks to restrict mortgage interest relief to the basic rate of interest.
Many buy-to-let landlords will feel the burden of this change and it may make some reluctant to enter or continue in this market. This change is a little short-sighted in a market where housing providers and local authorities rely heavily upon private sector landlords to house tenants. There is a housing shortfall in many areas, which is appeased significantly by private landlords.
Many landlords have invested in property for pensions. It is likely that there will be a huge retreat from this market by private sector landlords.
Philip Richardson, partner in the employment team:
It was evident from the Conservatives’ pre-election manifesto that further limits would be placed on the amount the highest earners could contribute to their pensions. This has been borne out in the announcement in today’s emergency budget that the maximum contribution by those earning more £150,000 will be tapered down from £40,000 to £10,000 a year. The cut is to fund a popular increase to the inheritance tax threshold.
The ground was well prepared for the reduction to the annual pension contribution limit which should come as no surprise to pension lawyers. However, the proposed consultation upon on “ISA style” pensions, an indication of the sort of radical reforms Mr Obsourne has referred to previously, was less well forecasted. A green paper will be published today into the pros and cons of a new type of pension fundamentally different from existing schemes, in that initial contributions are made from taxed income but are topped up by the government throughout the life of the pension.
Coming on the heels of the previous year’s budget in which pensioners were granted unprecedented freedoms regarding access to their pensions, as well as the ability to take a lump sum payment upon retirement, this proposal shows the extent of the savings reform that the Conservative government seems intent on overseeing.
Ensuring their clients maximise the current position regarding pension contributions should be the first priority of all pension lawyers, particularly as the entire removal of higher rate tax relief becomes ever more likely in the coming months in the opinion of a number of commentators.