One unusual feature of the UK population is our passion for property. Some parts of Europe don’t have the same obsession, but it is understandable when the political narrative for many years was the ‘Right to Buy’. Talking about ‘Rights’ is powerful because it makes people feel as though they are owed something by society. Property ownership is something that the younger generation increasingly feel is not attainable which is a turnaround from the previous generation which saw it as a ‘right’. Owning a main residence rather than renting is the preference for 86% of Brits but the rate of home ownership has fallen 10% in the last 20 years and 33% in the same period amongst theyounger generations.
Owning a second property as a holiday home or as a source of rental income is also a popular choice. Again, this is understandable as the gap between demand and supply has been so large for so long that prices have increased rapidly since the falls of 2007/2008. Any asset that looks like it has always increased in value is likely to be attractive to those that can afford it.
Property has also been taxed more lightly over the same period. In 2008 the top rate of capital gains tax was halved from 40% to 20% helping second homeowners who were buying and selling. The valuations of property for council tax have not been revised since 1991, leading to a situation where residents of Westminster are paying nearlya third of the council taxthat the equivalent house in Nottingham pays.
The tax tide has been turning in recent years though. The Conservative government gave councils the power to raise council tax on second properties to raise local income. They also removed some of the tax relief on mortgage payments available to landlords. The Labour government has not ruled out restoring the old rate of capital gains tax (which many will see as a doubling of the tax rate).
The cost of borrowing had already been causing property prices to fall slightly, with 2023 seeing a fall inaverage valuesacross the UK (excluding NI) and the largest drop of 4.8% in London. Whether an increase in tax will see further reductions remains to be seen but the stated intention of building 1.5m homes in the next five years would increase supply.
Property has been a great investment for individuals for several years now and there are some benefits still. One of the major downsides though is the lack of access to the capital. With all other assets you can sell them down gradually to spend on yourself. This is particularly important when you are phasing into retirement. When it comes to spending your money, spending capital is more tax efficient, flexible and means you can spend more, than just spending the income your money generates.
We have several clients transitioning into retirement this year and most are selling their second homes to create liquidity. This was never the plan as these sales were built into their cashflow plans for later retirement as a useful injection of capital. However, a potentially changing environment for tax and growth has accelerated their plans.
Property is slow to sell and so if you do want to get ahead of any potential changes, you need to start sooner rather than later.
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