Budget changes present businesses including landlords and letting agents with some real challenges in 2025
Rachel Reeves presented the Labour Government’s first annual Autumn Budget 2024 to parliament on 30 October 2024 to some consternation by those in business.
Ms Reeves has said that her budgets will be restricted to one per year and these will always be in the Autumn, though there’s now speculation she may need more than one. She has also stated that the tax rises included in this last budget are not to be repeated, again with some speculation she may not be able to stick to that promise.
Rachel Reeves' Autumn Budget 2024 introduced several changes that could impact property investors and landlords. One of the most significant changes is the increase in the Stamp Duty Land Tax (SDLT) surcharge on second homes from 3% to 5%. This change came with immediate effect on 30 October 2024. It will make investing in additional properties more expensive and potentially affect the profitability of buy-to-let investments.
One of Reeves’ most controversial changes is an increase in the rate of employer-based Class 1 national insurance contributions from 13.8 percent to 15 percent. The current rate of 13.8 percent is payable on the amount that an employee’s earnings exceed the secondary threshold of £9,100 per year or £175 per week.
The increased rate will be 15 per cent and the secondary threshold will be reduced to 5,000 per year or £96 per week. These changes to employers’ NIC rates come into effect on 5 April 2025. However, already businesses are anticipating the increases and making changes accordingly, second guessing how they will affect their employment policies – these changes are posing serious concerns for the UK’s retail and hospitality sector.
In addition, the minimum wage is to be lifted by 6.7 per cent, so those companies like Greggs, who employ thousands of part-time low wage staff, will have imposed significant extra costs, as will many UK firms.
While ostensibly aimed at employers, these changes will have an indirect effect on employees (including tenants), some redundancies could be in the offing, salary increases could be curtailed, and new recruitment could be put on hold. This is a consideration for landlords as rent affordability may be adversely affected.
There were other significant changes besides the budget that will affect businesses. Changes to employment law in 2024 - many of these changes will affect landlords directly (many landlords are employers) or indirectly as their tenants are mainly employees. The Employment Rights Bill was published on 10 October 2024. This Bill has been described as the biggest change to workers’ rights in a generation. Published alongside the Bill was the Next Steps to Make Work Pay which provides more details on the Bill’s proposals.
While the measures set out in the Bill are not due to come into effect until 2026, again they are influencing employment policy today as businesses look ahead to the implications for them.
2025 will see further scrutiny of this important Bill as it makes its way through Parliament and several wide-ranging consultation papers on key aspects of the Bill will be considered.
There will be ongoing developments in other key areas that will have implications in the months ahead, as well as some important pension changes. Key changes suggested include:
The Employment Relations (Flexible Working) Act 2023 came into force on April 6, 2024, and is “An Act to make provision in relation to the right of employees and other workers to request variations to particular terms and conditions of employment, including working hours, times and locations.”
The Neonatal Care (Leave and Pay) Act 2023 gives employees the right to take leave when their baby needs neonatal care.
Taken together, these measures will have profound effects on employers including landlords and letting agents (and many tenants) particularly in retail and hospitality businesses. These businesses are already feeling the strain even before some of the increased cost burdens apply. The result may be store closures and other businesses failing.
Overall, these changes could pose challenges for property investors and landlords, as well as retailers, particularly those operating on tighter profit margins. It's essential to stay informed and consider how these measures might impact your investment strategies.
Anticipating these changes, it is vital that property investors and landlords as well as letting agents consider how these measures will impact their business strategies, and particularly business tenants in retail may best consider renegotiating their lease arrangements (rent levels) to try to offset the higher operational costs.
While Tesco for example has stated it could face a £1bn increase in its NI bill over the course of the current parliament, it’s the small and medium-sized businesses that are expected to be the most severely impacted. Retail chains may be looking to close unprofitable stores, while small independent retailers, landlords and letting agents, need to urgently consider how they will absorb or pass on these extra costs of running their businesses.
Businesses have choices when faced with operating under a tighter cost regime: they could absorb the extra costs if they can afford it, meaning they operate on a lower profit margin, they can in any case cut back on expenses as far as this is possible or they could consider passing on some or all the additional costs onto their customers, that’s if the market will stand it, and their competitors follow suit.
Changes to CGT rates were effective from Budget Day last Autumn (30 October 2024). The lower rate of CGT (for basic rate taxpayers) will rise from 10% to 18%, and the higher rate of CGT (for higher rate taxpayers) will rise from 20% to 24%, quite substantial rises.
The CGT rate applicable to trustees and personal representatives will rise from 20% to 24%, while there will be phased changes to the CGT rates for Business Asset Disposal Relief (BADR) and Investors' Relief (Enterprise Investment Schemes (EIS)). From 6 April 2025, the CGT rate that applies to BADR and Investors’ Relief will rise from 10% to 14%. From 6 April 2026, this rate will further increase to 18%.
It is usually the case when rates increase that the legislation includes “anti-forestalling provisions”. These are designed to render ineffective any scheme where taxpayers have entered into arrangements to use the pre-budget rates. An example might be the using of unconditional but uncompleted contracts entered before 30 October 2024.
The rates of CGT that apply to residential property disposals (18% and 24%) remain unchanged.
CGT reliefs – for the tax year commencing April 2024/25 CGT relief is reduced to £3,000. In 2023/24 the amount was £6,000 and in 2022/23 it was £12,300 per person. Landlords disposing of capital assets should consider joint ownership and spreading disposals across several tax years to maximise reliefs.
If a retail business (and this includes landlords and agents as well as other businesses like high street stores) opts to increase their prices to offset higher costs, they need to carefully consider affordability for their customers, can (residential and commercial) tenants afford the additional rents.
Government has a legitimate reason to increase tax revenue to fund public services, but inevitably consumer spending and demand in the wider economy will be impacted because of these extra taxes. Higher prices will exacerbate the cost-of-living and housing crises, fuelling inflation, raising interest rates and making everyday goods and services more expensive for consumers. The general standard of living for every UK citizen sees a decline.
It is no surprise therefore that following the Autumn Budget over 70 of Britain’s largest retailers signed an open letter to warn the chancellor that the NIC hike would lead to price increases and job losses. Signatories of the letter included Aldi, Lidl, Boots, Ocado, Morrisons, Greggs and JD Sports – all these businesses have concerns about the viability of Rachel Reeve’s budget measure.
Small business tenants facing higher operational costs from these various sources may seek to renegotiate their lease terms. This could potentially lead to more flexible or reduced rent arrangements in the short-term, including profit related rents where businesses may be really struggling. Landlords are, depending on tenant demand, often reluctant to lose long-standing tenants, even if this means taking a lower rent.
There are several ways for landlords to offer incentives and concessions to tenants to help them through a difficult period. A temporary rent reduction plan may help their tenants to better manage their cash-flow, and landlords may be inclined to offer a reduced rent for early lease renewal or absorb some of the maintenance costs.
However, under the strain of these increased costs, including increased loan / mortgage interest payments, some landlords may find it difficult if not impossible to help their tenants out by renegotiating lease terms.
Tenants also, particularly in the retail and hospitality sectors, may be unable to generate enough income to meet their current lease obligations. This will inevitably lead to higher rates of tenant defaults and landlords will have no choice but to forfeit their leases and to remarket the properties.
When landlords are left with empty commercial premises their costs increase substantially at the worst possible time – when they have no rental income to cover these. Business rates, which are usually equivalent to the rent, fall on the landlord after 3 months, while insurance, security and utilities costs are also taken on from the tenant.
In view of these additional cost pressures on retail and hospitality businesses, the British Retail Consortium (BRC) sought meetings with the chancellor to discuss their concerns about the increased NIC rates. So far there has been no commitment from the Government to make any changes to their proposals.
Ian Stewart, chief economist at Deloitte has said:
“With cost control to the fore in the wake of the Budget, CFOs have trimmed expectations for corporate investment, discretionary spending and hiring in the next 12 months,”.
The survey showed that the government’s first Autumn Budget has “knocked business confidence” and reduced economic activity.
Reeves’ Budget measures have added headwinds to the UK economy that has already been losing momentum in the second half of 2024.
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