Budget focus: Property and EIS

As the date of the Budget draws ever closer – the 22nd of November in case you didn’t have it in your diary – the rumour mill begins to kick into overdrive around the measures Chancellor Philip Hammond will (or perhaps won’t) be introducing when he stands at the Dispatch Box.

Related topics:  Finance News
Andrew Aldridge
8th November 2017
Andrew Aldridge Deepbridge Capital
"The Treasury has benefited greatly from the increase in stamp duty charges for additional properties and the rumour mill is working over time that this will not be the end of such intervention."

This weekend’s papers were full of suggestions about what route Hammond might wish to go down, especially when it comes to the housing market and in particular whether the Government should be encouraging or discouraging investment in property. This is clearly an interesting conundrum for Hammond who inherited a series of measures designed to move more homes from the private rental sector back into home ownership – and who has been a private landlord himself.

Advisers, and their landlord clients, will be well aware of those measures including the 3% surcharge on stamp duty, the tighter underwriting and criteria measures for buy-to-let mortgages, the slashing of tax relief on mortgage interest payments, the four or more mortgaged property rule for portfolio landlords, and of course others like the banning of letting agent fees.

All have been designed to dis-incentivise individuals from either becoming landlords or adding to their portfolios. The evidence suggests this has been something of a success but it’s also clearly that the Treasury has benefited greatly from the increase in stamp duty charges for additional properties and the rumour mill is working over time that this will not be the end of such intervention.

According to The Sunday Times, for instance, a number of Conservative MPs have urged the Chancellor to go even further in terms of discouraging further property investment, pushing for much tighter buy-to-let loan criteria and an increase in pricing. How they plan to deliver the latter however is still a moot point. The feeling is that the UK is too reliant on ever-increasing house prices in order to fund retirement and that ‘property as my pension’ investors need to be encourage to look at other options which would help the UK economy and businesses as a whole.

Plus of course, dampening house prices – or at the very least ensuring they don’t rocket off again – would be favourably received by potential first-time buyers who continue to struggle to find a deposit without the Bank of Mum and Dad to help them, and would help further the Conservative’s apparent push for the younger vote.

One has to believe there is some merit to such an outlook, and such an approach – while being deeply unpopular with landlords – might actually provide encouragement for them to look elsewhere for their investments and would deliver a much-needed boost to smaller start-up companies or those who are working within innovative sectors such as technology and the life sciences for instance.

It just so happens that the Budget is likely to announce the Government’s own thoughts on its Patient Capital Review and ‘Financing Growth in innovative firms’ consultation which is all about finding routes to finance for those firms discussed above. Traditionally, it’s these types of businesses in these types of sectors which have struggled to get the finance they need, and the UK economy has perhaps not felt the benefits of these businesses who – if funded properly and in the right way – can add considerably in terms of employment, tax revenue, GDP, and all other manner of positive economic measures.

Part of the response to the Review and the consultation will focus on Enterprise Investment Schemes and Seed Enterprise Investment Schemes – funds which were designed to help these smaller, innovative firms secure funding via investors. There is a belief that some of the schemes have been too much about tax incentives and not enough about investment and we expect the Government to trim the sectors such schemes can work within, which will bring them back to how EIS/SEIS were originally envisaged and designed to work. The areas we are most passionate about – technology and life sciences – are likely to remain as core investment areas and this means that investors in EIS/SEIS have a chance to invest in highly innovative companies, some at the very start of their journey, with the potential to provide them with the initial boost they need to make a real difference.

It is feasible that the Chancellor will specifically look at how EIS/SEIS proposition have utilised property-reliant investments and seek to restrictthe reliance an EIS/SEIS qualifying company may have on owning property.

No-one is saying that investors should not continue to look at the property market as an investment opportunity, but we suspect the Chancellor will be very clear in the Budget that property is not the only investment out there, and that there are very clear and positive opportunities to not only find an investment home but to support the UK innovative businesses that are forging their way in these sectors. A point likely to be even more important in a post-Brexit world.

As advisers it is therefore important to offer clients a balanced portfolio of investment options and, post-Budget, a clear picture will emerge – one which we believe will favour the use of EIS/SEIS schemes in a tighter number of sectors and offer the right level of diversification for clients who might be looking for other homes for their investment money.

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