With the Chancellor due to present his next Budget to parliament on Wednesday 3rd March, we take a look at how the policies he will be considering could affect the legacy market.
Whilst much of the media coverage relating to the Budget may well centre around the Chancellor’s decisions on funding school meals and whether he maintains recent uplifts in Universal Credit, there are two issues to keep an eye on that could be far more relevant to the legacy sector:
- Firstly, will he extend the stamp duty holiday that has reduced the tax paid on the purchase of domestic properties beyond 31st March 2021?
- Secondly, will he provide any signals of how and when he intends to start paying back the enormous government debt the government has built up over the last 12 months?
Here we explore the potential implications of each of these questions for the legacy market.
Could an extension to the stamp duty holiday hold off house price falls?
The current stamp duty holiday that has extended the 0% rate of Stamp Duty Land Tax from the first £125,000 up to the first £500,000 of a property’s value is due to end on the 31st March 2021. Land Registry data suggest that average house prices were 7.5% higher in November 2020 compared to the same period in 2019 – a far cry from the doom and gloom expectations during spring 2020 [i] – suggesting that the policy may have been effective in supporting the property market through 2020.
Average House Prices, UK, £000s
HM Land Registry
At present, there is still a broad consensus that the economic fallout of the current crisis is likely to result in downward pressure on house prices during 2021 – for example, Oxford Economics project a 5% decline between the start of 2021 and the start of 2022. This raises the question of whether the Chancellor should attempt to cushion this fall by extending the stamp duty holiday further into the future.
Such an extension is likely to be politically popular, but the decision is not straightforward. Firstly, the current policy is already estimated to have cost the government more than £3bn [ii] – can the Chancellor afford to continue to extend the relief? Secondly, a further extension is unlikely to have the same stimulating effect on housing market activity as the initial policy. A lot of the boost to the housing market will be a result of what’s known as ‘forestalling’ – transactions that would have occurred later in 2021 being brought forwards to take advantage of the current scheme. Once this pool of ‘future transactions’ has been used-up there may far less of a behavioural response possible to further stimulate the market. Finally, there is the question of what the Chancellor is hoping to achieve – is it just an expensive way of delaying the inevitable correction in the housing market that needs to occur?
If the Chancellor does choose to further extend the stamp duty holiday, we can expect any significant drops in house prices to be further delayed, at least in the near term. This will help to support legacy income from residual gifts over coming months. However, if not, then we would expect falls in house prices to occur during the remainder of 2021 as the market begins to adapt to changing levels of income and employment.
Will the repayment of public sector debts impact on the value of estates?
Official figures suggest that the UK government borrowed an eye-watering £215bn between March and April last year, leaving government debt in relation to the size of the economy at levels not seen since the aftermath of the World Wars [iii]. The most recent estimates from the government’s own independent spending watchdog suggest this debt could grow to over £370bn by the end of March 2021. [iv]
Public sector debt as a % of GDP
Office of National Statistics
Although the level of debt is far higher, the situation is very different to that following the Global Financial Crisis in 2008. There is little immediate pressure for the government to pay the debt back – they have been able to borrow at incredibly low interest rates with the total amount of interest paid as a proportion of the amount of tax revenue expected to be lower following the crisis than before, despite the enormous increase in debt.iii
However, it’s likely that the Chancellor will come under increasing pressure to set out how and when this debt is going to be paid back. Given we are still in the midst of the crisis, it’s unlikely that we will see detailed plans laid out in the March Budget, but it is possible that some announcements will be made that signal the direction of travel the government is intending to pursue.
After many years of austerity, there is unlikely to be scope for substantial further cuts to public sector budgets, so the Chancellor will probably need to rely heavily on tax increases to improve the public finances. The key question from a legacies perspective is: will potential tax changes have a significant impact on the value of estates, and hence on residual bequest values?
In short, we do not expect any likely tax increases to have a dramatic effect on estates. This can be demonstrated through an example scenario for how potential tax increases are likely to impact on the value of estates.
Let’s assume that, realistically, the government can only commit to paying back a maximum of half the accumulated debt over the next 20 years (it’s now more than 10 years since the global financial crisis and public sector debt has, in fact, increased in relation to the size of our economy). Over this 20-year period we would anticipate the approximately 14 million people who will die in the UK to leave around £4,000 bn (or £4 trillion!) of assets in their estates (measured using today’s prices). As such, we can look at how the repayment of £185bn of government debt would affect the value of estates.
If we assume that the make-up of tax revenues remains broadly similar to how it looks at the moment, and that the share of those taxes accounted for by 65+s remains broadly the same –then we can estimate that around 24% of the burden of any tax increase is likely to fall on those over the age of 65 (for those who are interested, we have spelled out our calculations in the footnote below!) [v]
This means that if the government were able to commit to paying back £185bn of government debt, it would reduce the value of estates over the next 20 years by around 1%. Whilst this is a very broad brush estimate and, in particular, it doesn’t take into account that relatively wealthy charity legators could be disproportionately impacted by tax rises, it does demonstrate that the overall impact of tax changes is likely to be fairly minimal when compared to the total value of the estates that are likely to be passed down over the period.
This is particularly true when we take into account the political pressures that will make it far harder for the government to stick to any deficit reduction plan – with a minimum of four general elections over this period, the temptation for tax giveaways to generate short-term political gain will be very strong.
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[ii] Office of Budget Responsibility (2020): Annex A – Policy measures announced since March 2020, https://obr.uk/forecasts-in-depth/policy-costings/
[iii] Office of National Statistics (2020): Public sector finances, UK: October 2020, https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/october2020
[iv] Office of Budget Responsibility (2020): Economic and fiscal outlook – November 2020, Economic and fiscal outlook – November 2020 (obr.uk)
[v] Data suggests that 46% of tax revenue comes from income taxes (i.e. income tax and National Insurance) and around 15% of income is generated by those over 65. 32% of tax revenue comes expenditure taxes (e.g. VAT) and 31% of expenditure is by those over the age of 65. 9% of tax revenue is from wealth taxes (e.g. Inheritance Tax, Capital Gains Tax and Council Tax) and 30%-40% of wealth is owned by those over 65. 13% of tax revenue comes from business taxes and we assume that half of business taxes ultimately falls on the wealth of those owning the companies and half falls on the labour force of companies in the form of lower wages so we assume that around 27.5% of this revenue is ultimately borne by those over the age of 65. When we weight the proportion of revenue by the potential burden on those over 65 (it equates to around 24% of the burden coming from those over the age of 65.