What it means for you
Will Hobbs, Chief Investment Officer at Barclays, analyses what's in the UK Government’s latest Budget – and how it could affect you and your money.
The Chancellor has revealed measures to support the housing market, freezes in personal tax thresholds and continued help for people and businesses affected by coronavirus (COVID-19).
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The housing market
In terms of providing near-term support for the property market, the Chancellor’s announcements had mostly been publicised beforehand, but are nonetheless welcome.
The Chancellor confirmed there will be an extension of the stamp duty holiday on house purchases in England and Northern Ireland. This means you won’t need to pay tax on the first £500,000 of a property purchase price until 30 June. This threshold will then drop to £250,000 until September, before going back to the previous figure of £125,000 thereafter. He also introduced a new 95% mortgage guarantee scheme, allowing buyers to purchase properties with a value of up to £600,000 with just a 5% deposit.
If you’re currently buying a home, or if you’re thinking about moving soon, the stamp duty extension will give you more time to complete the purchase while taking advantage of a reduced tax bill. And while the mortgage guarantee scheme may not be of direct use to everyone, it could be useful if you’re supporting children or grandchildren who are trying to buy a property for themselves.
Overall, these measures may be helpful in the short term, but they don’t change the team’s view of the medium-term outlook for house prices. The last few decades have seen some remarkable increases, but the next few should see a return to the longer-term trend of lower growth. Many of the factors that drive exponential growth in property prices look like they will fade away in the future. Studies across many countries over longer periods point to growth that is virtually in line with inflation, so the past few decades in the UK should certainly not be seen as normal.
For those thinking about house prices in investment terms, comparing risk and return with other types of asset is obviously complicated. Many will understandably feel reassured by the tangible nature of a house that you can live in, versus a diversified portfolio with a range of investments. However, this approach tends to understate the concentrated risks of owning a property that’s exposed to the ups and downs of prices on a single street in the UK. That’s a very different prospect when compared to the opportunity of owning a small stake in hundreds – even thousands – of companies, for example, that gives you a truly diversified range of investments.
Over the decades ahead, we envisage stronger investment returns from that diversified access to the world economy when compared to those available in much of the UK property market.
As for a possible rise in interest rates, and how that might affect the property market, we think they’re likely to stay low for some time to come, although we shouldn’t be too confident about being able to predict where they will go in the medium term. This crisis, and the remarkably strong response to it from the UK’s (and the world’s) governments, might be a turning point for current trends in inflation and interest rates.
Tax and your finances
The scheduled rise in corporate taxes is certainly one of the areas that drew a lot of gasps from the media. At the same time, the Treasury froze income tax thresholds for basic rate and higher rate taxpayers from April this year until 2026, at £12,570 and £50,270 respectively. There will also be a hold, for the same period, on the pension lifetime allowance (which is £1,073,100), the annual capital gains tax exemption (£12,300 for individuals) and inheritance tax thresholds.
Corporation tax will rise in 2023 for businesses making annual profits of more than £50,000, up to a top rate of 25% for those with profits of more than £250,000 per year. However, there’s also a chance that if the economy recovers faster than expected in the next few years, the need to raise this rate to the extent the government has scheduled will fade a little.
When it comes to personal taxation, and how the Chancellor’s threshold freezes might affect the amount you pay, it’s a very complicated area. Using an ISA and other tax-efficient savings, such as a pension scheme, is a good way of making the most of your tax allowances. For Premier customers, our relationship managers can provide helpful context and guidance on this.
Coronavirus and the economy
Various measures for people and businesses affected by the pandemic are to be necessarily continued, such as the extension of the furlough scheme until the end of September, further grants for the self-employed, and a range of additional grants and loans for many businesses. In this context, we can see this Budget as part of wider global pattern of robust, ongoing support from various governments, including the UK’s.
We should welcome the continuing commitment of policymakers to provide this support. Borrowing costs remain low, even after the slump in government bonds, and the demands of the global economy remain great, even as the welcome signs of economic recovery multiply.
For investors, there are a couple of broader points to make.
First, of course, no one can know the detail of what’s going to happen next week, or beyond. This last year has been a perfect reminder of how it’s impossible to accurately predict the road ahead. How many of the dramatic changes to our working, playing and investing lifestyles will continue once the pandemic is over? How will taxes evolve over the next five to 10 years? Diversification is the obvious answer to the humble approach we should take when answering these, and many other, questions.
Second, the driving force behind the UK’s, and the world’s, growth prospects (and therefore the returns of a diversified portfolio of stocks and bonds) is not the prevailing corporate tax rate, nor is it many other aspects of this Budget. In fact, it’s difficult to spot any robust relationship between tax rates and growth. Future growth is based on the assumption that humankind will continue to invent new things and get better at using those things. This is productivity, the driving force of the dramatic changes in living standards over the last three centuries. This is the dominant force in long-term economic growth and is everything when it comes to future portfolio returns.
We can’t guarantee that our species will continue to invent new and amazing technologies, or that we’ll learn how to adapt them to create growth in profits in the future. However, a careful study of history suggests some optimism about the future is entirely rational. This crisis and the astonishingly quick arrival of several viable vaccines shows what can be achieved when accumulated scientific advances are combined with the right incentives. This is just part of what you can access if you have a diversified portfolio of investments.
The value of investments can fall as well as rise. You may not get back what you invest. If you’re not sure about investing, seek independent advice.
Barclays does not provide financial, legal or tax advice. Accordingly, nothing contained within this article should be construed as constituting legal, financial or tax advice. Tax rules and legislation can change, and the benefits and drawbacks of a particular tax treatment will vary with individual circumstances. We recommend that you take professional advice where required. You have sole responsibility for the management of your respective tax, financial and legal affairs, including making any applicable filings and payments and complying with any applicable laws and regulations.