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Briefings

Member Briefing: Follow up to Spending Review

Date: 27/11/15

Follow up to Spending Review

Spending Review (SR) 2015

Our Briefing on the afternoon of the Spending Review contained as much information as we had at the time. However we have subsequently been able to look at some of the measures in more detail and talk to Government officials and experts outside Government. The Briefing below provides further information on the Spending Review and Autumn Statement proposals, although it must be said many remain very sketchy.

 

Stamp Duty Land Tax (SDLT)

The new additional 3% Stamp Duty rate for the purchase of additional residential properties (e.g. buy-to-let and second homes) kicks in on 1st April 2016.

A consultation is due to be published very shortly on all aspects of the implementation of the new rates. However, we understand that the Government intends to provide transitional relief to buyers who exchanged contracts before midnight on Wednesday but are completing purchases from 1st April 2016.

It seems that the new rate is likely to raise some interesting definitional and enforcement problems. HMRC’s more detailed comments include:

“The higher rates will be 3 percentage points above the current SDLT rates. The higher rates will not apply to purchases of caravans, mobile homes or houseboats, or to corporates or funds making significant investments in residential property given the role of this investment in supporting the government’s housing agenda. The government will consult on the policy detail, including on whether an exemption for corporates and funds owning more than 15 residential properties is appropriate.”

 

Buy-to-let

The latest SDLT measure has to be seen in a much wider context. Alongside the July Budget announcements to limit tax relief for landlords’ rental income to the basic rate (to be phased in over four years, starting in April 2017), and change the way wear-and-tear relief is calculated for furnished lets, the SDLT change is part of the Government’s desire to promote home ownership by levelling the playing field between FTBs and investors. In its July Budget, the Government said:

“The current tax system supports landlords over and above ordinary homeowners.”

It also said that the Budget tax relief changes were.

“limiting the advantage that these individuals currently enjoy over those purchasing their own home”

(Whether it will fully do this is not clear as the financial calculations for BTL borrowers are completely different from those applied to a FTB, so BTL investors may be able to pay a higher price, and so outbid a FTB.)

From April 2019, a payment on account of any CGT due on the disposal of residential property will be required to be made within 30 days of the completion of the disposal.

There are also important developments in relation to buy to let lending at the Bank of England. The Financial Policy Committee (FPC) is responsible for overall financial stability – so-called macroprudential policy. (It does not regulate individual lenders or borrowers.) It assumed new powers of direction in 2015 in relation to lending to owner-occupiers – it can direct lenders to limit the amount of lending at certain LTVs or Loan-to-Incomes.

However the FPC cannot be expected to have responsibility for overall financial stability if it has very limited control over a large proportion of mortgage lending, namely lending to investors. The Treasury is expected to publish a consultation before the end of 2015 on granting new powers of direction to the FPC in relation to BTL lending. These powers are likely to be granted next year.

The Bank has recently expressed growing concern recently about BTL lending. In a recent speech, FPC members Sir Jon Cunliffe said:

“The key development in the housing market however has been the rise of mortgage lending to ‘buy to let’ purchasers – .i.e. landlords – rather than to owner occupiers.  The private rental sector in the UK has been growing rapidly over the past 15 years partly due to structural reasons.  The stock of mortgage lending for buy to let has increased from £65bn to £200bn over the last decade.  And it is growing quickly now, by around 9% a year.  Buy to let now represents 16% of the overall mortgage stock and accounted for 80% of net lending over the past year.

Rapid growth in any type of debt financed activity should always lead a macroprudential regulator to have a closer look.”

 

Affordable Housing

The 400,000 dwellings quoted in the SR is made up of:

Starter Homes

200,000 (including the £2.3bn 60,000)

HtB Shared Ownership

135,000

Rent to Buy

10,000

Existing AH commitments

50,000

Specialist housing for older people and disabled

8,000

TOTAL

403,000

 

The detail around the Starter Homes funding is yet to be worked out but it is probably that it will take a similar form as the £26m fund set up by the Government in August to support builders in the delivery of Starter Homes.

The affordable end of the new build market - both formal AH/S106, and market housing which is affordable – is now very crowded and it is difficult to see how Help to Buy Equity Loan (HtB1), Starter Homes (SH) and the new HtB Shared Ownership (HtB SO) are all going to coexist without significant overlap. The HtB SO income limits are so high it will, in theory, overlap with HtB1 and SHs.

However HtB SO seems likely to be rather less attractive to higher income households than HtB1 or SHs.

First, buyers only own a share of the property.

Second, the lenders lend at up to their highest new build LTV (usually 80% or 85%) on the owned share: so buying a £160,000 property, at 50/50, the deposit would be £12,000 (at 85% max new build LTV – e.g. Nationwide). HtB1 is 5% deposit. The lenders are very cagey at present about the deposit they are likely to require for SHs. Unless it is 5%, the scheme would be far less attractive. However until/unless the lenders’ serious concerns about the scheme are resolved, they may want to impose their usual new build LTV limits, so that deposits of 10-15% would be required.

Third, with mortgage rates so low, it must be questionable whether buying 50/50 will be any more affordable, in terms of monthly payments, than buying under HtB1 or SHs. The Government says rents on the rented share of HtB SO cannot exceed 3%. However at 3%, this is close to current mortgage rates, so the monthly cost of mortgage payments on the owned share and rental payments on the non-owned share could be close to, or even higher than, the monthly costs of buying under HtB1 or SHs.

 

Planning

The planning proposals announced in the CSR will be the subject of various consultations due out before Christmas. It is understood that there will be three (or more) consultations – one relating to planning policy changes, the second relating to provisions requiring amendments to the Housing and Planning Bill and a third, specifically related to the requirements for starter homes within the planning process.

The introduction of a new “local plan delivery test” is, in effect, what HBF asked for in the paper, Increasing Private Housing Supply (August 2015). It is currently understood that the test will be measured over a two year period and local authorities that fail to deliver against their local plan targets within that time will have policy sanctions imposed on them.

This positive move does, however, come with the concern that local authorities will seek to blame developers for not building out sites with permission quickly enough and we will need to work hard to come up with an acceptable solution to this difficult issue, particularly in the light of the constant backdrop of “landbanking” claims by anti-development organisations.

The extension of the ability to appeal against unviable S106 agreements by a further 2 years to 2018 is a reflection of the recent Ministerial letter to LPAs reflecting the effects of reducing social rents as well as the introduction of starter homes as affordable housing an product. The latter is expected to be achieved through a much broader definition of affordable housing rather than specifically referring to starter homes (although this will be part of the consultation on starter homes).

Work continues on the standardisation of S106 agreement clauses and the possibility of a new arbitration process for planning obligations. 

“Amending planning policy to support small sites” seems to go some way towards meeting HBF’s proposal in Increasing Private Housing Supply that local plans should provide the widest possible range of sites, by size and location, rather than the current tendency to allocate a limited number of large sites. The detail of how such a proposal would work in practice will be part of the consultation process.

Proposed changes to the neighbourhood planning process will allow neighbourhood plans to allocate additional sites for development that might not be included in a local plan. This will also extend to allowing neighbourhood plans to revise green belt boundaries to allow for additional development.

The review of the New Homes Bonus payment will resurrect the proposal to exclude dwellings granted on appeal to further incentivise local decision making. However, exactly how this can be done is currently quite complicated and thus will require consultation regarding the details.

 

Finance

We understand the £1bn Builders Finance Fund (BFF) to be extended to 2020-21 (from 2016-17) is not new money.

The £2.3bn in loans to help regenerate large council estates and invest in infrastructure needed for major housing developments splits £300m for estates regeneration and £2bn for the Large Sites Infrastructure Fund.

 

Apprenticeship Levy and the future of CITB

The new Apprenticeship Levy will be set at a rate of 0.5% of an employer’s pay bill and will be collected via Pay as You Earn (PAYE). The pay bill will be calculated based on total employee earnings; it will not include other payments such as benefits in kind and will apply to total employee earnings in respect of all employees. The Levy will be introduced in April 2017.

All employers in England, Scotland and Wales with a pay bill of more than £3 million will pay the Levy. Employers will receive an allowance of £15,000. The effect of this allowance is that the levy will only be payable on pay bills in excess of £3,000,000 – employers with a pay bill less than £3,000,000 will not pay anything.

Employers in England will be able to reclaim the money they pay via a new digital voucher system and if they ‘are committed to apprenticeship training’, will be able to get out more than they pay in to the levy, through a top up to their digital accounts. Every employer will have the opportunity to direct the funds that are available in their digital accounts to meet their apprenticeship training needs with approved training providers, and will be given a reasonable amount of time to do so. Where employers choose not to use the funds in their digital accounts, the Government will make these more widely available. While the majority of SMEs will be exempt from the Apprenticeship Levy, there are currently no details as to whether vouchers could be passed on in the supply-chain or from larger employers directly to SMEs. Government will consult with industry and employers on how the future voucher mechanism will work.

Much of the detail underpinning the new Levy is yet to be made clear, but for employers in the construction sector the new Levy will sit alongside the existing CITB Levy and much work also remains to be done on the future relationship between the two levies. It is likely, however, that since construction employers, including HBF members, have made clear that they are not in favour of paying more overall under the two levies than they do now to the CITB, the result will in practice be a squeeze on CITB revenue from its own Levy. It is too early to say how big such an impact on CITB funds might be, but our understanding is that several hundred construction employers will probably be required to pay something under the Apprenticeship Levy and so the financial impact on CITB will not be insignificant.