The Budget and spending – a new direction?

Last year’s Budget announced reduced taxation to protect working people, investment in the NHS, infrastructure and housing, with the promise of economic growth. After months of market testing various possibilities, the Chancellor’s focus has shifted  to the following goals: cutting the cost of living; cutting the NHS waiting list; cutting debt and borrowing; as well as ending the two child benefit cap. Funding these changes is difficult given the Chancellor has chosen to comply with the undertakings in the Labour Party manifesto not to increase the rate of income tax (well at least not on earned income) nor VAT.

Having floated the idea of cutting government spending by reducing the welfare bill, which was strongly rejected by the Labour Party, the Chancellor has opted for ‘fairness’  by asking people to contribute to the additional costs resulting from the new goals by freezing income tax reliefs for a further three years, increasing income tax on property and dividend income, while also introducing a ‘mansion tax.’

Turning to the housing market, the government confirmed its commitment to building 1.5 million homes by the end of this parliament. This remains a very challenging goal. The increase in housing supply has been slow this year, with just 44,000 completions in the first two quarters (Office for National Statistics). Housebuilders are affected by last year’s increase in National Insurance contributions and the employment market is subject to rising taxes on earned income, given frozen reliefs. While further investment of £48m in recruiting 350 planners should speed up the pipeline of developments, it will take time to have effect.

The government’s decision, without warning, to end the Energy Company Obligation (ECO) scheme in 2026, has created problems for low-income households and small businesses, and added to uncertainty in the housing sector. The explanation for the change was the saving of £59 a year for households, as the scheme is funded by a levy on energy bills. It will be replaced by a retrofit scheme in the expected Warm Homes Plan, but the details are not known. The industry is suggesting a 12-month delay to facilitate an orderly transition to the new scheme, to protect both small businesses and those in fuel poverty.

On the demand side, pre-budget speculation about changes to the stamp duty regime and concerns about a ‘mansion tax’ potentially applying to homes selling for more than £500,000, led the market to stall. Will demand decrease if rents rise due to additional tax on landlords’ rental income (see below) and potential house buyers suffer greater tax on earnings due to freezing of tax reliefs? It is not surprising that the Office for Budget Responsibility (OBR) is forecasting that the number of homes delivered in this parliament is likely to be 1.49 million in the UK (compared with the original target of 1.5 million just for England),  which will be back-end loaded as housing starts are currently ‘subdued.’

A mansion tax is to be introduced but there are no changes to the stamp duty regime for housing. The rationale for the mansion tax is that council tax is not fairly applied, citing ‘a typical family home across England paying more than a £10m house in Mayfair.’ The government could have reformed council tax; instead, they propose to make the regime fair by charging owners of high value properties additional council tax. They will be subject to a High Value Council Tax Surcharge (HVCTS) in England, from April 2028, if their residential property is worth £2 million or more. The charge will be £2,500 at a value of £2m, rising to £7,500 per annum over £5m. This is a ‘slab’ tax, which increases by steps. For example, at £1 below £2m there is no charge but at £2m the charge is £2,500. There are likely to be disputes over valuations, especially as house prices increase. It is not surprising that there will be a consultation on how to deliver the HVCTS, nor that implementation will be delayed until 2028.

Meanwhile, local councils will continue to set council tax rates; consequently, people who occupy properties of the same value, in different areas, will continue to pay different amounts of council tax. Council tax will remain a postcode lottery unless there is fundamental change.

The Budget papers contained updates on previously announced initiatives – decisions on the locations of new towns will be announced in the spring and funds of £1.3bn will be provided from the National Housing Delivery Fund to Mayoral Strategic Authorities such as Manchester.

Providers of social housing will be pleased to see that the government remains committed to the 10-year rent settlement for 2026 to 2036 of CPI+1% per annum.

Individuals who are property landlords (including housing, retail, commercial and leisure) will be subject to an additional 2% charge on property income from 2027/2028. The basic rate will be 22%, compared with 20% on earned income. The current higher (40%) and additional rates (45%) will each increase by 2%. Some housing landlords may respond by passing on the tax charge through higher rents, while others may decide to sell their properties back into the owner-occupied market, reducing the availability of property for rent and exacerbating the housing crisis.

The Budget papers were full of comments on infrastructure and construction projects which had previously been publicised. However, some new investments of government funds or assistance did emerge, including the Lower Thames Crossing (£891m), EV charging infrastructure (£100m) and Grangemouth industrial projects (£14.5m), Docklands Light Railway and Port Talbot Land Remediation (£4.2m). The government is to enable the third Heathrow runway (but with no government funding) and establish the Leeds City Fund as a 25-year Business Rates Retention Zone, supporting the Northern Growth Corridor.

Changes to business rates, particularly for the retail, hospitality and leisure sectors, are currently the cause of controversy. On Budget Day, the government announced its intention to ‘rebalance’ the business rates system in England. Lower business rates would be charged to the retail, hospitality and leisure sectors, which would be funded by charging higher business rates on commercial properties with rateable values over £500,000.

Business rates are paid by the occupier and calculated on the rateable value of a property multiplied by a specific value (the multiplier). The business rates reduction was to be achieved by discounting the multiplier for retail, hospitality and leisure sectors by 5p. Transitional relief was to be provided over 3 years where business rates would increase….

Initially welcomed, the mood changed when the government issued revised rateable valuations. Businesses have been alarmed to find that their overall business rates bill has not gone down but has increased significantly. The reduction in the multiplier has not been sufficient to compensate for substantial increases resulting from the hikes in rateable value, while high value properties have not benefitted from a discounted multiplier. There are accusations that this is another stealth tax, which is not affordable even with transitional relief. The consequences are that some tenants may cease trading or relocate, which would not be a good outcome for investors nor for the sustainability of the high street.

Tax changes aimed specifically at the construction and real estate industry have been announced. The Construction Industry Scheme, which applies to construction projects, is to be simplified with improved administration of the scheme. The legislation will appear in the 2025/26 Finance Bill and be effective from 6 April 2026. The government also intends to crack down on tax evasion by entering into a new international agreement which will facilitate automatic exchange of ‘readily available’ information on real estate from 2029 or 2030.

Much has happened since the Chancellor’s first Budget in October 2024, where the intention was to fix the foundations of the economy and deliver change by ‘protecting working people.’ The government undertook to ‘strengthen the fiscal framework… taking difficult decisions on tax, welfare and spending.’ Current projections point to reduced living standards and ‘constrained economic activity’ (OBR). While the government has not delivered its promises from 2024, it’s not too late to change course.