The political events from last week that will significantly impact on the Scottish housing market are the UK Budget and the Scottish Government Housing Minister’s announcement on the future direction of the new Housing Bill. We look at both of these in turn briefly below and attempt to draw out likely impacts.
The UK Budget
The first Labour Budget in 14 years was one of the most significant in recent British political history. It signalled a clear change of direction in government.
There was a large hike in taxes (around £35 billion) as well as a huge increase (of around £30 billion) in borrowing. This is to boost government spending on services as well as raise capital spending on things like new infrastructure projects.
As our business is largely housing north of the border, we will try to examine the measures that will impact on things here.
More money for the Scottish Government – Scotland will get a big rise in spending of around £1.5 billion this year and £3.4 billion next year. This allows the Scottish Government additional resource to address the housing emergency, notably on the provision of direct funding for new affordable housing, the budget for which was slashed by £200 million at the end of last year.
Employers need to dig deeper – The amount that employers pay on their National Insurance contributions will rise from 13.8% to 15% in April 2025. The threshold on which employers start paying these contributions on workers’ earnings was also lowered from £9,100 to £5,000. This raises much of the additional tax take (around £25 billion). It will impact on the costs of all businesses, including those involved in delivering housing, which have already been dealing with rising costs for a number of years. It will of course impact on every type of business in the UK, including estate agencies.
Inheritance tax extended – Inherited pensions are to be brought into inheritance tax from April 2027, meaning that those with tidy SIPPs may need to think about financial planning again. From April 2026, owners of land will have less benefit from agricultural and business property relief. 100% inheritance tax relief will only be applicable on the first £1 million, reduced to 50% above this point. There are therefore less tax advantages of holding land, although the scarcity of land may mean that it has relatively little affect on prices. This move also incentivises people to start thinking more about downsizing and passing on wealth to their families earlier.
Non-doms no more – The abolition of the non-dom tax regime ends the benefit for UK residents with permanent homes overseas not paying tax on their foreign income. These residents were a source of demand for prime properties. If they now have less interest in residing in the UK, this will affect this market by reducing the presence of wealthy international buyers. However, this impact will primarily be felt in Central London. In Scotland, there are relatively few such buyers and the market is very indigenous, even at the top end.
Private schools in the VAT – Bringing private schools into the VAT regime has met with much consternation from the schools themselves as well as parents who use them. Given the new government’s commitment to this in opposition though, it was not a surprise. It is difficult just now to see what the fall-out will be, but we expect properties in the catchment areas for high attaining state schools will see more demand and prices rising in areas such as Morningside (Boroughmuir High School) and Giffnock (St Ninian’s High School).
Many investors were no doubt relieved that Capital Gains Tax on residential property remained unchanged at 18% (for basic rate taxpayers) and 24% (for higher rate taxpayers), when raising these rates was closely considered.
Other measures, such as increasing the Additional Dwelling Supplement (ADS) on second home purchases (including buy to let) from 3% to 5%, do not apply in Scotland as property tax is devolved. In any case, the rate in Scotland is already higher at 6%.
The markets have reacted nervously, with a sell-off of UK government bonds in response to the additional Government borrowing costs. The pound is also trading lower. However, it does not seem that we are in the territory of the disastrous Kwarteng ‘Mini-Budget’ of September 2022, which caused a crisis in the bond market and the pound to crash to a record low.
Nevertheless, the overall outcome of this additional borrowing is that interest rates will likely remain higher over the next few years. Expectations are now for a 0.25 base points cut in early November, when the Bank of England Monetary Policy Committee meets, with rates to reduce by another 0.5 base points over 2025 (a lower reduction than had previously been expected).
The Housing Bill
Another big event was the announcement of another change of direction (of sorts) on housing policy in Scotland.
The Minister of Housing (Paul MacLennan) delivered a statement to the Scottish Parliament on Halloween on the Government’s approach to Stage 2 of the Housing Bill. You can read in full here.
There were no treats on show though.
The main area of contention around the new Bill is the introduction of a new system of rent control. The Minister announced the intention to bring in a national system of rent control to stabilise rents and tackle poverty, but in a balanced way that protects landlords’ property rights as well as supporting investment into the private rented sector (PRS).
The Minister announced the following changes to the Bill.
- In areas where a rent control is designated, a cap of CPI + 1% up to a maximum of 6% will be set. The Bill previously made provisions of a cap of 0%.
- This cap will apply within tenancies as well as between tenancies, i.e. it applies to the property and not the tenancy during the period of the rent control designation. Despite a lot of effort, the industry has not got the Scottish Government to budge on this key point.
- There may be exemptions for certain properties from rent controls or to allow increases above the cap. This will be subject to another consultation exercise in Spring 2025. Again, the industry has only had partial success in its engagement efforts.
All the other political parties at Holyrood expressed dissatisfaction with the new measures as can be seen from the debate here. The parliamentary arithmetic means that the Government will have to do some form of deal with one of the parties to get its Bill through.
No-one can accuse the Minister of not engaging with all the various players in the sector (he has worked energetically), but it seems that in trying to placate everyone he has met, he may end up pleasing no-one. His statement also leaves the PRS market in a continued state of uncertainty (if not anxiety). Without greater stability, the sector will likely reduce further, which will have impacts on availability of such housing.
If supply is the main way out of the housing emergency, failing to exempt Mid Market Rent (MMR) and Build to Rent (BTR) seems a missed opportunity. MMR and BTR schemes that are in abeyance will likely remain so until far greater certainty is provided and no or little new investment will come in.
But such new investment should be building on the existing PRS (providing additional homes for rent not just replacing those already there). Rent caps per se are not unworkable but having them between as well as within tenancies is much more rent setting than rent control. In rent-controlled areas, new tenancy agreements would not reflect current market rates but will be locked to levels set by government. The flaw here is the assumption that, from the start, all rental properties align with open market rates. They often don’t – this is a misstep that will likely limit housing supply and discourage new investment.
The approach also risks keeping rents artificially low, deterring the investors needed to expand housing options, especially in high demand areas where this investment is most needed.
At least with the Budget, we all know where we stand and can plan ahead accordingly. With the Housing Bill statement, we are a good bit less sure.