On September 23, the UK Chancellor, Kwasi Kwarteng, announced the biggest tax cuts since 1988. Kwarteng’s plans – under new Prime Minister Liz Truss – are designed to kick-start the UK’s economy, ‘breaking the cycle of stagnation’ and reducing the UK population’s tax burden.
At a glance: Kwasi Kwarteng’s £45 billion tax cuts include:
- Additional tax rate of 45% scrapped and the top tax rate is capped at 40%
- Basic income tax cut one year early, dropping to 19% in April 2023 (12 months ahead of previous plans)
- Stamp duty abolished on property valued up to £250,000 (up from the previous £125,000 threshold), with first-time buyers exempt from stamp duty on property valued up to £425,000. First-time Buyers’ Relief can now be claimed on a property up to £625,000
- No corporation tax increase: corporation tax to remain at 19% (instead of the 25% planned)
- Removal of cap on bankers’ bonuses
- Reversal of National Insurance increase
- No rise on beer, cider and wine duty as previously planned
- VAT-free shopping for tourists visiting the UK
- Introduction of investment zones offering tax cuts to businesses to support job creation and output. The areas will have looser planning rules that support new commercial and residential property builds
- Introduction of new legislation to support the delivery of 100 key infrastructure projects in the UK
Mini-budget: what do the changes mean?
Stamp duty & the UK property market
As expected, stamp duty land tax (SDLT) has been cut, with no stamp duty payable on property valued up to £250,000 and stamp duty no longer applicable for first-time buyers purchasing property up to £425,000. First-Time Buyers’ Relief can now be claimed up to £625,000 – up from the previous £500,000. The changes will enter into force permanently, rather than being applicable for a specific period, as we saw during the pandemic.
The changes to SDLT are designed to incentivise and support first-time buyers to get onto the property ladder in light of the rising interest rate environment.
Pre-mini-budget, the press was full of predictions about potential falls in property values or a ‘bubble-burst’ scenario, especially in light of inflation and rising interest rates. We have always had a nuanced view of recent speculation about a potential ‘shock’ correction in property prices, given the high demand for property and lack of stock in some pockets of the UK, as well as broader macroeconomic factors (specifically low unemployment levels, stable wages, and high homeowner equity in property). Even ahead of the fiscal update, we didn’t think we would have seen a significant correction in property prices and believe this is less likely to happen now. However, there may be lower transaction volumes in some parts of the market.
The government also announced plans to make more government land available to build new homes, addressing the current lack of stock and bolstering the property development sector and associated industries. The government is proposing that the land will create ‘community hubs’ with additional investment opportunities created as hospitality, leisure and commercial space are needed in these areas. We expect investment in property and infrastructure building will be supported by debt. With lenders seeing the opportunities presented by the mini-budget, we anticipate many of these institutions will be eager to facilitate borrowers’ access to finance.
Plans to raise the corporation tax slashed, no increase in national insurance
Businesses will be pleased to hear the proposed corporate tax increase is reversed. The news will be welcome to many companies, especially given the current pressure on talent, supply chains, energy costs and so on. While the press has covered challenges for many UK businesses, as a broker of corporate finance, we have seen many requests from UK companies looking to raise debt to capture growth opportunities in recent months. Our experience is that many businesses (especially small and medium enterprises) are flourishing despite economic headwinds, and higher tax rates would have made scaling more difficult and potentially inhibited these growth opportunities.
The announcement to cap UK corporation tax at 19% means that the UK’s Corporation Tax rate is highly competitive and is now lower than other G7 countries. We believe the tax rate will bolster investment into businesses and create an increasingly entrepreneurial environment, supported by responsible borrowing.
The reversal of the plans to raise national insurance is also good news for businesses, with more than 900,000 businesses expected to benefit. We expect that the savings companies will make compared to what they would have been paying will be reinvested back into businesses, supporting growth and easing pressure on employers.
News about no increase to the corporation tax rate will be especially welcome to professional landlords, many of whom own property in limited companies. Because these vehicles are taxed under corporation tax rules, landlords stand to be better off than they would have been under the previous plans to increase the corporation tax rate.
Additional tax rate cut
The additional tax rate cut for taxpayers is also welcome. Taxpayers pay tax in bands, with an additional tax rate of 45% applicable on income above £150,000. Under the new changes, the additional income tax of 45% is scrapped and will now be capped at 40%. This will translate to good savings for higher income earners, for example, under the new rates (applicable from April 2023 and calculated on the basis of the basic tax rate cut and abolishment of the additional rate):
- An employed individual on a salary of £150,000 will save £2,095 per year*
- An employed individual on a salary of £175,000 will save £3,657 per year*
- An employed individual on a salary of £200,000 will save £5,220 per year*
As always, a change in one part of the economic landscape will affect others. More disposable income is always a good thing, especially in the context of a slowing economy. We believe those in stable employment will enjoy a reduced tax burden which may translate into additional spending in areas like property investment.
Mini-budget: in conclusion
We see the mini-budget as a welcome relaxing of fiscal policy under Liz Truss’ leadership. The changes reflect a move away from an approach of relatively heavy taxation of UK corporations and employers (i.e., corporation tax and the previously proposed national insurance increase) for their success, and taxpayers for their hard work. We think the changes will increase investment opportunities and spending, support the economy, and boost growth. As always, finance – whether in the form of mortgages, corporate finance or other types of borrowing – will support many of the opportunities presented by the tax cuts and reforms.
*for informational purposes only and should not be constituted as advice or definitive savings
