Chancellor Rachel Reeves has delivered Labour’s first budget since 2010, focusing on “restoring economic stability” with a tax-centric approach. This article examines the implications of the budget for owners, landlords, and investors of commercial real estate, particularly concerning Capital Gains Tax (CGT), business rates relief, and stamp duty changes.
Capital Gains Tax Changes
The budget has introduced adjustments to Capital Gains Tax (CGT) that will affect property owners, landlords, and investors contemplating property sales. The concerns surrounding CGT rates, particularly in light of potential changes, had previously spurred a flurry of transactions as stakeholders aimed to secure existing rates before any alterations were announced.
In a significant development, the budget specifies that the rates for Business Asset Disposal Relief (BADR) and Investors’ Relief (IR) will maintain their current level of 10% until 2025. After this period, the rates are scheduled to increase to 14% in April 2025 and subsequently to 18% in April 2026. This phased approach provides a window of opportunity for those considering disposals to plan their transactions with clarity about the future tax landscape.
This staggered increase allows investors and business owners to strategise their asset disposals with an understanding of the forthcoming tax regime. It gives short-term relief with a clear timeline for future increases, helping stakeholders make informed decisions in managing their investment portfolios and business assets.
John Birchall, Partner and Head of Valuation at Fenn Wright commented: “The immediate implementation of the new rules will affect numerous ongoing transactions, including those involving development land sales and commercial property disposals. While residential properties are not subject to the increase, second homeowners are notably affected by the SDLT hike. The impact may be particularly significant for development sites, where CGT can be substantial.
Although the increases are not as steep as some had anticipated, they could still lead to some casualties in the sector. It is unlikely, however, that there will be a major reduction in the number of transactions that successfully complete.
Additionally, the removal of agricultural property relief on CGT will affect almost all farms, as very few are small enough to avoid this change.”
Business Rates Relief
Business rates represent a significant expense for landlords and a key consideration for investors, particularly when properties remain unoccupied for extended periods. The Chancellor’s budget extends a 40% relief on business rates for the retail, hospitality, and leisure industries until the 2025/2026 fiscal year, capped at £110,000 per business. This move aims to alleviate some financial pressure and help these industries maintain profitable margins. The Chancellor has signalled that these reliefs will become permanent from 2026.
Significantly, for owners and occupiers of larger premises such as logistics warehouses (with rateable values of £500,000 or more) the rates multiplier will be increased, and so will pay more in business rates. One assumption is that Challenger is attempting to redistribute business rate income from High Street to the warehouse in a bid to close the competition gap between brick-and-mortar and online retailing.
However, the relief does not extend to other sectors, where landlords might need to absorb these costs, especially for vacant properties. This scenario compels landlords to remain competitive in a market that increasingly values affordability and flexibility, which is an important consideration for investors assessing the viability and potential returns on their investments.
Stamp Duty Increase Impact on the Private Rented Sector (PRS)
The budget also introduces an increased stamp duty on second homeowners, which is poised to affect the private rented sector (PRS). This increase could exacerbate the challenges faced by residential investors, who are already beleaguered by mounting regulatory and tax burdens. The potential reduction in the rental pool of properties due to this could have broader implications, affecting housing availability and rental market dynamics.
Mark Minchell, Chair of The CPN Investment Panel and Director at Flude Property Consultants, notes, “Increased stamp duty on second homeowners will also affect the private rented sector (PRS), affecting already beleaguered residential investors and having a wider impact if there is a reduced rental pool of properties.”
Planning System Changes
The budget also addresses the planning system, promising to “simplify and streamline” processes. However, based on past experiences, such initiatives often lead to more complexity and slower procedures, rather than the intended efficiencies. To support these changes, there is an investment of £46M earmarked for recruiting and training 300 new planning officers. While this shows a positive intention to bolster planning resources, it’s widely perceived as insufficient to promptly address the significant staffing shortages within local authorities. This measure, although a step in the right direction, may not substantially alleviate the current constraints in the near term.
Broader Economic and Sector Implications for Investors
The budget’s approach suggests a shift towards ending short-term fiscal strategies, advocating for a longer-term view, especially as taxes on business premises disposals increase. This could influence commercial property owners, landlords, and investors to adopt a more long-term perspective in their investment and management strategies.
Investors, in particular, may see opportunities in industries such as retail, hospitality, and leisure which benefit from targeted fiscal relief. Yet, for those invested in sectors outside these privileged areas, the need to explore alternative strategies to sustain profitability becomes more urgent. Moreover, the government’s emphasis on the energy sector and ESG goals indicates that the market for flexible office spaces and sustainable properties will likely expand. Investors proactive in aligning their portfolios with these trends by developing sustainable workplaces and enhancing ESG credentials may find themselves well-positioned in the post-budget landscape, potentially maintaining higher occupancy rates.
Reflecting on the government’s budget announcement and its implications for Cambridge, Philip Woolner, Equity Director and Managing Partner at Cheffins, Cambridge-based property experts, commented:
“The budget has provided a notable boost for research and development sectors, particularly here in Cambridge. With a specific commitment to continue fully funding the Horizon programme, we can expect a significant positive impact on primary research activities within our local science hubs. This initiative not only supports existing research frameworks but also enhances Cambridge’s standing as a leading global research centre.
Additionally, the government’s commitment to the East West railway and the allocation of £10M to the Cambridge Growth Company are crucial steps towards realising the growth strategy for the region. These developments promise to enhance connectivity and infrastructure, further solidifying Cambridge’s position as a hub of innovation and economic development.”
In conclusion, while the budget introduces challenges through increased taxes and operational costs, it also presents opportunities for those prepared to adapt to a more sustainable and long-term focused market environment. Commercial property stakeholders, including investors, should consider these changes as pivotal in shaping their future strategies.
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