He came with a red box and spoke for an hour; now the country knows what George Osborne has in store for it in the next five years and this summary aims to set out how this will affect the property industry. While the long-term implications of the measures announced on Tuesday will only become apparent in due course, we hope this summary can make clear the key areas that will affect our clients.
1) Capital Gains Tax
The government’s efforts to generate revenue and “reduce the incentives to convert income into capital gains” were slightly less drastic than anticipated. CGT increased from 18% to 28%, though only for those within the higher tax bracket. This is markedly lower than the rise to 40% expected by many and came into force from midnight on Tuesday and so predictions that the market would be flooded with second homes causing property prices to drop appear to have been unfounded.
The government is also extending CGT exemption for entrepreneurs from the current £2m lifetime gains mark, to £5m to promote enterprise.
2) Public sector cuts
Cuts in departmental budgets of approximately 25%, or £44bn will come into full effect by 2014.
Public sector workers will also have a 2 year pay freeze, although those earning below £21,000 will be exempted.
The Chancellor was very critical of the “culture of excessive pay at the very top of the public sector”, and stated that from now on the highest paid public sector workers can be paid no more than 20 times that of their lowest paid employee.
VAT will rise from its current level of 17.5% to 20% by 4thJanuary 2011. Some commentators have estimated that this will raise the cost of living by 2%. If consumer spending falls as a result of this, retailers may put increased pressures on landlords over rents. The rise brings the UK closer into alignment with the rest of Europe, where the average VAT rate is 21.3%.
Deferral of this rise however to 2011, will give retailers some time to try and accommodate the changes within their business models.
4) Corporation tax
Corporation tax, currently at 28% will be reduced to 24% via four annual percentage point reductions. This will leave the country with the lowest rate of corporation tax it has ever had.
In summary, the government is focusing on cutting the deficit via reduced spending rather than increased taxation, (spending cuts make up 77% of savings, tax increases only 23%). However, more severe measures may well be introduced in the government’s spending review in October.