This piece by Tom Bill, head of UK residential research at Knight Frank
Tomorrow’s spending review may provide a few clues about the government’s priorities and political framing for the Budget, which is expected to take place in late October or early November.
The key question is: will the Chancellor interrupt the process of a market that is re-pricing and getting back on its feet?
The government will not be enjoying headlines about departing wealthy foreign investors,but the issue of how it treats wealth is a live discussion inside the cabinet.
Prime Minister Keir Starmer recently said the UK can’t tax its way to growth. However, it followed the leaking of a memo from deputy Prime Minister Angela Rayner to the Chancellor last month which set out ways to do precisely that.
Rachel Reeves faces three difficult choices in order to meet her own fiscal rules. Cut spending, which will annoy both backbenchers and frontbenchers. Raise taxes, which voters won’t like and could be self-defeating. Or convince highly sceptical financial markets that she is going to loosen her own fiscal rules without sending bond yields and mortgage rates higher.
It’s an unenviable position. But it’s also why any policy that drives away foreign investment or shrinks the tax base in such circumstances has obvious flaws.
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Anyone familiar with the prime London property market will have found the conclusions of a study last week into non dom tax reform unsurprising.
One key finding by former Treasury economist Chris Walker was that the government relied on a flawed analysis of how many non doms would leave the country if the system was scrapped.
The report also warned of a tax shortfall if enough non doms left the UK and underlined how new inheritance tax rules were a key deterrent. The government was warned about all of the above and more during months of lobbying by groups including Foreign Investors for Britain.
Under the old rules, individuals could live in the UK without paying tax on overseas income and gains. The new regulations limit this to four years and mean their worldwide assets are subject to UK inheritance tax.
As a result, countries like Italy, which operates an annual flat tax that ringfences overseas income, have become more attractive.
The new rules explain why the number of sales in prime London property markets in the six months to May fell 7% versus the previous year. The number of new prospective buyers registering fell by 13% over the same period, Knight Frank data also shows.
Average prices in prime central London declined 2.2% in the year to May, which was the steepest annual drop since last August. A quarterly price fall of 1.4% was the widest in almost five years.
In prime outer London, where a higher proportion of demand is driven by needs-based and domestic buyers, average prices rose by 1.1% in the 12 months to May.
A stamp duty hike in April has kept demand even further in check over the last two months. The second home surcharge rose to 5% from 3%, which will take some time to digest.
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