UK Property Market Update – Q4 2024

The UK property market is undergoing significant changes, with leasehold reform taking centre stage as part of the government’s commitment to improving homeownership rights. On November 21st, the government announced that reforms to grant leaseholders greater control over their properties and phasing out the feudal leasehold system would be accelerated in 2024. These changes could have substantial implications for property investors, particularly those holding leasehold portfolios or considering investments in leasehold properties.

Key measures outlined in the Leasehold and Freehold Reform Act include:

• Enhanced Rights for Leaseholders: From January, the rule requiring leaseholders to wait two years before they can buy their freehold or extend their lease will be abolished. This creates immediate opportunities for leaseholders to gain greater ownership control, which could enhance the appeal of leasehold properties in the short term.
• Improved Building Management Options: By spring, leaseholders in mixed-use buildings will have the right to take over the management of their buildings. Additionally, they will no longer be liable for their freeholder’s costs when filing claims against them, making disputes more financially manageable.
• Ban on New Leaseholds: In the second half of the year, the government plans to consult on and outline its approach to banning new leasehold arrangements entirely, a step that could fundamentally reshape the structure of property ownership in the UK.

For investors, these reforms present a dual opportunity and challenge. While greater transparency and fairer practices may increase the attractiveness of leasehold properties to prospective buyers, the potential phase-out of new leaseholds could shift long-term investment strategies. Mixed-use developments and existing leasehold assets may require closer scrutiny to understand the financial and management implications of these changes.

Investors should stay informed as the details of the reforms unfold, particularly regarding how these measures will affect service charges, dispute resolution costs, and the broader valuation of leasehold properties.

On October 20th, Chancellor Rachel Reeves delivered the first Labour Budget in nearly 15 years. Amid claims of a £22 billion “black hole” in public finances, expectations were high for a budget focused on tax increases and spending cuts. For property investors, this budget introduced several changes with implications for investment strategies, new housing developments, and tax planning. Here’s a closer look at the key announcements.

Capital Gains Tax (CGT) Changes

Capital Gains Tax (CGT) is levied on profits earned when selling or transferring an asset, such as an investment property. In a notable shift, the Chancellor announced an increase in CGT rates for non-residential assets, with the lower band rising from 10% to 18% and the higher band increasing from 20% to 24%.

However, residential property sales remain unaffected, maintaining their current rates of 18% for basic rate taxpayers and 28% for higher rate taxpayers. This distinction offers stability for property investors focusing on residential portfolios, while those with diversified investments in non-residential assets will need to adjust for the increased tax burden.

Stamp Duty Land Tax (SDLT) Surcharge

Stamp Duty Land Tax (SDLT) continues to be a major consideration for property investors, particularly when acquiring additional properties. Previously, buyers of investment properties or second homes paid a 3% surcharge on top of standard rates.

From October 31st, this surcharge increased by an additional 2%, rising to 5% for second homes and investment properties. Importantly, this change does not impact first-time buyers or those purchasing a primary residence. Investors planning to expand their portfolios should account for this added cost, particularly in markets with higher property values where SDLT is already a significant expense.

Inheritance Tax Stability

In a move that brings some predictability to estate planning, inheritance tax (IHT) rates will remain frozen until 2030. This tax applies to estates valued above £325,000, with a rate of 40% levied on the portion exceeding this threshold.

Despite being a contentious issue, IHT affects only a small proportion of estates—approximately 5% in 2023/24—yet it generated £7 billion in revenue. For property investors, exemptions such as business relief, agricultural land exemptions, and the ability to pass on pension pots tax-free remain crucial tools for reducing IHT liabilities. The Chancellor’s decision not to introduce new changes allows investors to continue leveraging these strategies effectively.

As the property market continues to adapt to economic and political changes, proactive tax planning and careful portfolio management will be essential. Investors may benefit from consulting with financial advisors to navigate these changes and seize opportunities in a shifting landscape.

In November 2024, the Bank of England announced its second base rate reduction of the year, lowering it from 5% to 4.75%. For property investors, this move carries significant implications, particularly regarding borrowing costs and market sentiment.

How the Base Rate Impacts Investors

The base rate influences the cost of borrowing, including mortgages—a key consideration for property investors. A lower base rate typically aims to stimulate consumer spending and economic activity. However, the immediate impact varies depending on the type of mortgage:

• Fixed-Rate Mortgages: If you’re locked into a fixed-term mortgage, you may not feel the effects of this rate reduction until your term ends and you remortgage.
• Variable-Rate Mortgages: Borrowers with variable-rate mortgages are likely to see changes reflected more quickly in their repayments.

These shifts in borrowing costs could improve cash flow for some investors, allowing greater flexibility for reinvestment or portfolio expansion.

What’s Driving the Rate Reduction?

The decision to lower the base rate aligns with Chancellor Rachel Reeves’ Autumn Budget, where substantial government spending plans were unveiled. This budget has recalibrated financial markets’ expectations, suggesting that future interest rate cuts may occur more slowly than initially anticipated.

In announcing the rate cut, Bank of England Governor Andrew Bailey emphasised caution, noting:

“We need to make sure inflation stays close to target, so we can’t cut interest rates too quickly or by too much.”

Inflation: A Key Consideration

Although inflation remains far below its October 2022 peak of 11.1%, the Consumer Price Index (CPI) rose to 2.3% in October 2024, up from 1.7% in September. This places inflation back above the Bank’s 2% target. Despite this, the overall rate of price increases has moderated significantly compared to the surges seen in 2022 and 2023.

The Bank of England also monitors sector-specific inflation, such as rising costs in the services industry, to gauge the broader economic impact. Striking the right balance is crucial to avoid inadvertently stalling growth or needing to reverse rate cuts prematurely.

Global Factors at Play

Global events are also influencing market dynamics. Donald Trump’s re-election as U.S. President introduces potential economic uncertainty, as his administration’s tariff policies may affect prices worldwide. Investors in the UK property market should remain alert to how such developments could ripple through financial markets and impact borrowing costs further.

What This Means for Property Investors

For investors, the base rate reduction presents opportunities and challenges. Cheaper borrowing may open doors for new acquisitions or refinancing strategies, but the gradual approach to further cuts underscores the need for prudent financial planning. As inflation trends stabilize, maintaining a diversified portfolio and monitoring market conditions will remain essential.

By staying informed and responsive to changes, property investors can navigate the shifting landscape and position themselves for long-term success.