Budget aftermath - live blog

Posted by: Jules Birch

23/06/2010

Thursday 11.15 am It's not all doom and gloom for everyone in housing. Property investors, landlords, letting agents and estate agents breathed out a sigh of relief that the coalition did not follow through on the Lib Dem policy of increasing capital gains tax (CGT) to the same rate as for earned income (currently 40% or 50% for higher-rate taxpayers) and reducing annual exemptions. Alongside Conservative backbenchers and thinktanks and the Mail and Telegraph they found a range of arguments against - that the increase could reduce the tax take, that it could lead to a wave of sell-offs of buy-to-let flats and destabilise the housing market, that it would unfairly penalise enterpreneurs - to go alongside the obvious one that they would pay more tax.

In the event, the rate was only increased from 18% to 28%, prompting perhaps the understatement of all Budget reactions from the  National Landlords Association: 'It could have been worse.' 

As Liam Bailey of Knight Frank points out, the change broadly restores the position to what it was before the 2008 Budget, when Labour scrapped the 40% CGT rate and the taper relief that reduced the effective rate to 24%. His judgement: 'In reality the rise to 28% for higher-rate tax payers is a non-issue for the housing market.'

The Association of Residential Letting Agents (ARLA) conceded that the increase was 'not as extreme as anticipated' but argued that 'it still comes with little consideration for the needs of landlords'. It said the failure to include rollover relief when landlords sell one property and buy another was a 'big gamble' that may 'further decentivise some landlords from remaining in the private rented sector and negatively impact the overall supply of rental property'.

However, accountants, estate agents and housebuilders told the Financial Times that the change was about as good as it could have been, arguing that the decision to introduce the change immediately rather than delay a few months would avoid triggering a mass sell-off to avoid the increase.  

In the longer term, cuts in the local housing allowance will be a bigger issue for landlords. The British Property Federation argues in its budget analysis that cuts including restricting the local housing allowance rate to the 30th percentile for the area amount to 'a massive reduction', one that 'unless landlords reduce their rents, will result in a shortfall that LHA tenants will have to make up themselves'.

Wednesday 2.10 pm Could things get even worse? The Institute for Fiscal Studies has just released a briefing that says the squeeze will be the deepest since at least World War Two.

Health and overseas aid are already protected and the signs are that defence and education will not be cut as much as anything else. The IFS says that means the cut in departmental expenditure limits in ‘areas such as higher education, home office, justice, transport and housing’ could be not 25% but 33%.

1.30 pm The housing benefit cuts led off today’s  World at One coverage of the aftermath of the Budget - and there are definite signs that there will be further reform.

Extended interviews with Conservative MP Bob Blackman on the reforms he tried as leader of Brent. He says the key issues are the cost of administration, the poverty trap and resentment among people working who see their neighbours getting something for nothing. He admits the target of cutting the total bill by 7% is ‘extremely ambitious’ and says administration has to be simplified to cut red tape and make it easier to understand. ‘Why on earth do we need every local authority to be doing it?’

Labour leadership contender Diane Abbott concedes the need for reform but argues that only one in eight housing benefit claimants are unemployed and that many already pay something towards their housing. ‘We’re going to see thousands of people in London evicted,’ she says.

Housing minister Grant Shapps represents the government in a roundtable debate with Labour’s Pat MacFadden and the Lib Dems’ Simon Hughes. He admits the challenge but says something has to be done about a benefit costing £21bn. 

The key principle for Shapps is that ‘if you can work you should always be in a better position than if you don’t work’. He adds that the issue of people choosing not to work ‘as a lifestyle thing’ was raised repeatedly on the doorstep in the election campaign. MacFadden challenges him to say how many people are getting the £2,000 a week highlighted by the chancellor and he concedes it’s not many. 

Hughes says there’s a consensus for reform and that something has to be done about the work trap - one of his constituents could not afford to keep her flat if her working boyfriend moved in. ‘We have to make sure we find a way to make it possible for people to stay in the same home if possible and work.’

10.40 am Here’s the reaction so far:

The National Housing Federation was first off the blocks with a claim that up to build up to 250,000 affordable homes could be axed as a direct result of the cuts. As for ‘a significant economic return to the country’ (see 9.10) chief executive David Orr said ‘that’s exactly what affordable house builders deliver’. 

He also attacked the housing benefit restrictions on over-occupation in the social sector: ‘Whilst it is good that these restrictions do not apply to retired people, they should not mean that people of working age feel forced to move to give up a spare room if their children have grown up and left home. Having a spare room where children can come and stay is an important part of family life and the ongoing support that parents like to be able to give their children.’

Shelter said the housing benefit cuts could push many households into debt, eviction and homelessness. Chief executive Campbell Robb said the debate must not be muddled with examples taken just from Central London. ‘We are really concerned that even at current levels, nearly half of local housing allowance claimants are already making up a shortfall of almost £100 a month to meet their rent.’

The charity also warned that the change to support for mortgage interest  would create additional uncertainty for thousands of people. Robb said: ‘The reality is that most people on SMI are on higher than average interest rates, so there is a real danger it will no longer help the people who need it most and could trigger a surge in repossessions.

Citizens Advice said the housing benefit changes would mean people on benefit will not be able to live in some parts of the country or in certain areas of a city. Policy director Teresa Perchard said: ‘We predict more debt and homelessness, as people try to make up the difference between the rent they must pay and the benefit they receive.  Larger families in particular may be forced into poorer quality or overcrowded housing.’

The  Chartered Institute of Housing welcomed the prospect of housing benefit reform but warned that the changes could force claimants out of affluent areas, increase pressure on social housing registers and risk landlords refusing to let to people on benefit. ‘We also need to remember that today’s announcements only look at cutting costs, and that we can expect more fundamental reforms to come in future,’ said its president Howard Farrand. 

The CIH has also published its own summary of the Budget and a new briefing paper  on the background to spending and policy decisions. 

9.10 am So what do we know so far? Here’s a quick summary:

Department expenditure limits outside of health and international development will be cut by at least 25% in real terms over the next four years. The final total for Communities and Local Government could be more than that if departments like defence and education are not hit as hard. The detail will come in the spending review on October 20.

Capital investment will be protected to some extent but it’s not yet clear whether new affordable homes would be included in that or whether ‘projects that offer a significant return to this country’ only include transport infrastructure.

A raft of housing benefit cuts will save £1.8bn a year by the end of the parliament. In the social sector, they include penalising tenants of working age who are over-occupying. In the private rented sector, there will be caps by bedroom size with a maximum of £400 a week for a four-bed home and the local housing allowance will be set at the 30th percentile of local rents. In both, anyone on jobseekers allowance for more than 12 months faces a 10% cut in their housing benefit and non-dependent deductions will be unfrozen.

Support for mortgage interest will be reduced to the Bank of England’s average mortgage rate - potentially hitting borrowers with sub-prime lenders who pay much more. 

Capital gains tax will be increased from 18% to 28% for higher rate tax payers. That will affect buy-to-let landlords and second home owners but much less than they had feared. The Budget also reversed Labour plans to end tax breaks on furnished holiday lettings - a common way for second home owners to evade tax.

VAT goes up to 20% in January. That will increase the gap still further between the rate paid on refurbishment work and on zero-rated new build.

Council tax incentives for new homes will be considered in a white paper to be published later in the summer. 

Public sector pay will be frozen for the next two years for anyone earning more than  £21,000 - the previous Conservative plan had been a one-year freeze for anyone earning more than £18,000.

For more detail, see yesterday’s live blog and Inside Housing news.