The Autumn Budget - what’s really going on?

With the rumour mill running overtime ahead of the Autumn Budget our chief policy officer Chris Norris looks behind the headlines to outline how the plethora of proposed tax changes could impact the private rented sector – and the likelihood of change.

Silly season is upon us. Even better, silly season with an expectation of Autumn Budget is serving up a smorgasbord of tasty taxable titbits to mull over whilst we wait for MPs to get back from their holidays…. Sorry, their important time dealing with important local issues for their constituents over the summer.  

Parliamentary scepticism notwithstanding, it does seem to have become standard procedure for the months before a major fiscal event (in this case the Budget Statement) to be used by the Governments to trail every conceivable tax reform to test public appetite.  

This ‘pitch rolling’ as it is often called leads to speculation, hours of debate, and in the case of those potentially facing tax hikes a great deal of concern.

This week alone the NRLA has given countless media interviews on rumours about National Insurance.

A few weeks ago the focus was Capital Gains Tax, and as we get closer to Budget Day those whispers currently doing the rounds in Whitehall will no-doubt surface for a day in the sun.  

Should I be worried?

For the most part, unless you work in public policy or the media, my advice is usually to ignore the speculation unless it’s backed up by someone in the know who is prepared to go on the record, but with budgets the likelihood of an official statement is almost nil.

In fact the last time a Chancellor openly spoke to the press about the contents of their budget before delivering it was Hugh Dalton in 1947 – and his indiscretion directly led to his resignation the following day.  

So without any confirmation we have to take all speculation with a pinch of salt and try to assess the likelihood of:

A: the rumour being based on an actual, potential, policy being considered by HM Treasury; and

B:  that any Chancellor in their right mind would risk announcing it at the Dispatch Box.

It’s not always easy to get right.  

Infamously, in the summer of 2015 many commentators, myself included, dismissed speculation that George Osborne would remove mortgage finance relief on the basis that it was an absurd suggestion which conflicted with the basis of only taxing profits not revenue.

I stand by that assessment to this day, but I was very much mistaken about Mr Osborne’s intentions.  

What about this year, can we expect a major announcement?

Given what we are told about the state of the nation’s finances and the maddening rules Rachel Reeves has imposed on herself when it comes to tax increases, Number 11 will be desperate to find a ‘Goldilocks’ policy, that is something that generates revenue without reducing economic activity or losing her government votes. And, of course, doesn’t tax ‘working people’.

Which is where private landlords come in.  

There are two common assertions made about rental income, that my colleagues and I find ourselves challenging on an almost daily basis.

A: That rental income is passive. Of course it’s not, being a landlord is hard work; and

B: That it is untaxed, or at least less taxed than other forms of income. Also patently untrue as illustrated by the billions of pounds paid by NRLA members alone to the Exchequer every year.

Our efforts aside, these opinions have some sway in government circles, meaning that we are very much in Ms Reeves’ firing line.  

To date, the most significant rumours fall into one of three camps: 

• National Insurance contributions (NICs) 
• Capital Gains Tax 
• ‘Wealth’ 

Applying our two criteria above, I have no doubts that all of these areas are the subject of active discussion at the Treasury. But are they feasible and realistic? 

Wealth tax

A wealth tax is debated every year and would be politically extremely popular.

The problem arises when any minister tries to define wealthy.

It is relatively easy to tax income, hence we all pay Income Tax, but it is much more difficult to target assets or funds tied up in a variety of illiquid forms.

The discussion inevitably turns to property, which is difficult to hide or off-shore, but the question then becomes about how to tax property without forcing its sale.

Afterall a landlord may hold millions of pounds in property assets, but they are being used in their businesses and impossible to liquidate without disposal in most cases.  

It is quite possible that a brave government may try to hit the very wealthy with a one off, windfall style tax, but an ongoing wealth tax would prove challenging and possibly incompatible with our current means of taxing capital gains.  

Capital Gains Tax (CGT)

Speaking of capital gains, this is likely to be an area of far more concern for private landlords.

Capital Gains Tax gets tampered with almost every year, be it rates, allowances, or deductions.

There is a strong argument that the current system is not effective, or fair, although we may  differ between us about to whom it is unjust.  

The writing has been on the wall for some years for the annual exempt amount, which the last government reduced so much as to make it almost academic.

Serious conversations will be taking place in Whitehall about why there is such a difference between the rates of Income Tax and CGT.

Any changes here would undoubtedly hit landlords hard, although (unthinkable as it may seem) there could be ways that a smart Chancellor could reform the system to incentivise long-term property investment. Something we will be talking more about in the coming weeks.

Spotlight on National Insurance Contributions (NICs)

For now, all of the running this week has been about National Insurance Contributions (NICs).

The Times ran a front page story suggesting that the Chancellor could be about to impose NICs on landlords, but it’s not the first time this particular rumour has reared its head this year.

I know first-hand that a number of left-of-centre think tanks have been working on this for a while, although most have found the revenue likely to be generated for the Exchequer underwhelming.  

Again, it would be popular with a lot of the public, or at very least not unpopular.

Most people don’t really think about NICs much and when they do that thinking is limited to their paycheque.

However, feasibility would depend on exactly what the Government had in mind.  

How would this proposal work in practice?  

Class 1 NICs

To bring landlords into scope of Class 1 NICs, the kind paid by employers and employees, as implied by the Times, would be complicated and costly.

Not impossible, but arguably not worth the effort, especially at the same time as trying to migrate landlords over to Making Tax Digital.

Class 4 NICs

An alternative approach would be to expand Class 4 NICs, the type paid by the self-employed.

This would be easier, as it is compatible with self-assessment, but it would arguably generate relatively little, cost quite a lot to collect, and has a cut-off age of 66-years old – meaning that a large proportion of existing landlords simply wouldn’t have to pay it. 

A third approach?

A third way would be to adopt an approach proposed by the Resolution Foundation a few years ago, namely creating a whole new class of NICs for property.

This is obviously possible, but would be expensive and bureaucratic. The justification would have to be based on how high they planned to set rates and what the forecast revenue was likely to be.  

Ultimately, a NICs change is possible – but would it help the Government? 

Estimates vary about how much applying NICs would generate for the Treasury. It could be anywhere between a few million pounds and £2 billion, which is a sizeable sum.

However, what would the impact be in the wider economy? 

When a penny is added to a pint of beer at budget-time, no one expects publicans to absorb that cost. We all understand that each drink will cost (at least) a penny more.

The same will be true of an NIC charge on rental income, maybe not because every landlord will want to increase rents, but because it will be included in every affordability assessment and stress-test carried out by every mortgage lender.

The costs will have to be passed on, both to cover our costs and to meet underwriting rules for the majority of us with mortgages.  

That will hit rents, which hits affordability, which affects spending power and economic growth because, unlike the pint of beer that can be foresworn occasionally, demand for homes is inflexible.  

So, could there be any truth to these rumours?  

Yes, absolutely.  

Should the Government hit landlords with yet another tax grab? 

No, but not just because landlords have been hit too many times already, perhaps more significantly, because doing so would drive rents up at a time that the Government is desperate to ease the housing crisis. In short, it would be a tax on homes, little more.  

More information

For the NRLA’s response to The Times story click here

To listen to Chris’s interview on the National Insurance plans on Times Radio click the link below.