Now that we have had time to think about the Budget, it still seems as odd - or perhaps unfocused - as it did on first sight.
This article was written for and first published in Accountancy Live.
It was always going to be a difficult Budget for the Chancellor, Philip Hammond. He started with two major problems that virtually dictated that he try to preserve available cash reserves; the Office for Budget Responsibility’s downgrading of its forecast productivity growth from 2% to around 1.5% for every one of the next five years, and the uncertainty created by Brexit. He also faced the political need to do something to try to push back the growing popularity of the Labour party. In particular, he needed to show that he cares about disaffected young people, a major impetus in the surge in Mr Corbyn’s popularity, and the travails of the struggling (at least in their own minds) middle classes.
The two headline-grabbers were the imposition of CGT on non-resident investors and the abolition of stamp duty land tax (or stamp duty as he insists on calling it) for first-time buyers of starter homes. In the cold light of day neither seems sensible. If productivity has stalled one of the best ways to restore some confidence in the economy would be to attract foreign companies to set up here, in spite of Brexit. So, why has he chosen this time to deter foreigners from funding the building of factories and offices to generate growth? That is not to say that taxing non-resident investors in UK land is a bad thing in itself, but rather that one might expect a Chancellor to be sensitive to the likely knock-on effects of what he wishes to do. Introducing even a good idea at a bad time is fairly silly.
The SDLT relief is hedged with restrictions, so its initial attractiveness is likely to quickly fade and, in any event, £2,500 of SDLT on the average house purchase (£263,000) in an era when the price of that house increased by £11,000 over the last year is not the real problem. Virtually everyone agrees that the real answer to the housing crisis is to significantly increase housebuilding and the only way this is going to happen is to relax the sanctity of the green belt around our major cities. Until a government grasps that nettle, the tinkering with incentives to buyers who cannot afford to buy whatever the incentive, is largely irrelevant. Having said that, I read that the Budget has indeed revitalised the market in starter homes, although I suspect that many people do not realise the many cases in which it does not apply, such as where the building society insists on Daddy’s name being added to the conveyance; where the purchase is by a trust because Daddy will fund the deposit; only if the property is safeguarded in the event of a divorce; or where a property is bought jointly with friends and one of those gets her parents to buy her share.
The decision to move non-resident landlord companies from income tax to corporation tax is also misconceived. It seems to be prompted by the risk that large landlord companies will escape the interest cap if they are left within income tax. The snag is that most non-resident landlords are not large companies and many have invested in the UK for years and understand the basic income tax rules by now. In the future, they will have to grapple with the loan relationship rules, which can be very complex, particularly in relation to foreign exchange, which is rarely a problem for UK landlord companies but is much more likely to be one for foreign companies.
Freezing the VAT limit for the first time in almost 20 years, so as to force a few thousand more people to have to face the well known ‘cliff edge’ trap strikes me as simply mean. Refocusing EIS relief towards risk investments seems sensible, but doing it in such a way that at the time of the investment an investor will have no idea whether or not he will qualify, as the relief depends on HMRC ‘having regard to all the circumstances prevailing at the time of issue of the shares’ to decide whether relief is due, creates massive uncertainty, and defining acceptable risk as where it is more likely that an investor will lose money than make money is surely going to discourage most potential investors. That is, to say the least, an odd approach to an investment incentive.
My immediate reaction on the Budget, was that the Chancellor probably did not do much harm even if he did not do much good either. On reflection, the second part of that statement was probably accurate but the no harm bit is far more dubious.
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To discuss this article further, get in touch with the author, Robert Maas, on the details below. You can also read CBW’s detailed summary document of the 2017 Autumn Budget, written by CBW’s tax experts.