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An update on the economic backdrop ahead of the UK Spring Budget 2021

- Phil Shaw, Investec Chief Economist



What is the property market outlook ahead of the UK Spring Budget 2021?

- William Scoular, Head of Private Client Lending Group, Investec Real Estate


What is the property market outlook ahead of the UK Spring Budget 2021?

- William Scoular, Head of Private Client Lending Group, Investec Real Estate


What taxation changes can we expect in the UK Spring Budget 2021?

- Simon Bashorun, Investec Wealth & Investment

The panel answer audience questions, including on UK property market opportunities, the inflation outlook, capital gains tax, and the outlook for the pound.


The panel answer audience questions, including on UK property market opportunities, the inflation outlook, capital gains tax, and the outlook for the pound.


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What is next for the UK economy?
Key points
  • Modest tightening will signal fiscal responsibility.
  • Extension of key measures will fuel the recovery.
  • The government expects a clearer picture by June.
  • UK economy set to bounce back. Inflation and sterling will rise.


The chancellor's key consideration going into the new fiscal year will be how to power the post-Covid economy, says Investec chief economist Philip Shaw. For this reason, he is unlikely to unveil any significant tightening measures, which would kick the legs out from under the recovery before it has even begun. This would also sit uncomfortably with expansionary attitudes in the US and Europe, said Shaw. 


With several budgetary announcements in the last year, Shaw notes that the government's increased reliance on fiscal policy is unlikely to abate. While the UK economy has been more resilient than anticipated, increasing job loss figures highlight the need for continued support – especially as the furlough scheme has yet to end. Losses to the UK economy have been valued at £280 billion, but this figure could be revised up by at least £100 billion, as unemployment and second-order impacts are factored in. 


However, the government's seemingly limitless ability to borrow money cannot continue to support the economy forever, and Shaw said running large deficits for long periods risks reducing investor sentiment.


What is Rishi going to do? 


Instead, Shaw expects Chancellor Sunak to unveil a modest set of measures that will establish the government's fiscal responsibility. 


However, Shaw points out that if the Conservatives want to stand by their 2019 election manifesto, the budget will be a non-starter. The pre-pandemic document promised there would be no income tax, Value Added Tax (VAT) or National Insurance increases. 


That limits the chancellor's arsenal for increasing government revenue to corporation tax, capital gains tax and pensions tax relief, said Shaw. There has also been some speculation on a wealth tax, but he believes this is unlikely.


Corporation tax set to rise 


Shaw said he thinks a rise in corporation tax is the most likely course of action for Sunak, who could implement a partial increase now and re-evaluate the situation in an Autumn Budget when there is more clarity on the outlook.


Against this likelihood, Shaw emphasised the need for the government to continue supporting the economy – particularly small businesses, many of which are still struggling. He said he expects Sunak to extend measures like the furlough scheme, stamp duty and business rates holiday. 


Impacts on the economy 


Shaw said he expects the UK economy to bounce back in the second half of the year, predicting that gross domestic product could grow 6.4% by the end of the year and 6.5% in 2022. 


Although inflation volatility is set to rise over the next twelve months, Shaw explained this would be due to the lifting of Covid-19 restrictions and the one-year anniversaries of the oil price drop and the temporary VAT cut, which will mechanically drive the inflation rate up. However, Shaw said he does not see a threat to the Bank of England's 2% inflation target over the next year. Double-digit inflation is way out of the question, and rising rates, as well as volatility, are not to be perceived as a bad thing, he said. 


Another result of the UK's successful vaccine rollout will be a rising currency. Shaw said he expects the pound to stay at $1.40 by year-end and climb to $1.53 by the end of next year – although he warned this will not happen in a straight line. 


"If I were Chancellor"


Asked what he would do in Rishi Sunak's shoes, Shaw acknowledged that he would be hesitant to consider fiscal tightening, as he would want to let the economy gain momentum first. However, he said that corporations have benefitted from government support schemes and it seems appropriate corporation tax should rise over the medium term. 


"I would look to take a gradual route out of the deficit and aim to get it to fall over the medium term. Reducing absolute debt is impossible and counterproductive," said Shaw.

What will the post-Covid property market look like?
Key points 


  • Government intervention is boosting demand and supply dynamics.
  • Covid-19 is having an uneven impact on property sectors. 
  • Prime central London property will rise to record values. 
  • End of stamp duty holiday will not cause property crash. 


"Despite the UK operating a free market economy, where supply and demand govern price, the government has a significant influence on how the property market trades," said property expert William Scoular. 


While the pandemic has not spared the property market, Scoular explained that government intervention had enabled its resilience. Tools such as the stamp duty holiday, the low-interest-rate environment and stimulus through schemes such as Help to Buy have spurred demand. Meanwhile, supply has been encouraged by the re-examining of development controls and planning laws as a result of Covid-19.


Pandemic winners and losers 


Scoular highlighted the resilience and growth of the UK residential property market since the beginning of the pandemic. According to the Office for National Statistics, UK property values rose by 8% across the country. But this has not been uniform. North West England emerged as the key winner – experiencing more than 10% growth – and London was crowned the loser as prime central property values fell by about almost 4% and rents saw a significant drop. Meanwhile, house values saw almost double the gains compared with flats. 


While retail property values have recovered, Scoular explained this was due to a strong bounce in logistics property at the expense of high street retail. The government has tried to help in this regard by making planning policy more efficient to allow for the repurposing of locations without planning consent. That has led to the emergence of interesting new themes and trends, such as laboratories or retail warehousing spaces. However, Scoular said it is hard to see how the gaping holes in the high street will recover. 


On the other hand, Scoular is convinced offices still have a future – although their occupation may differ, as companies prioritise in-person contact for culture, spontaneous collaboration and mental health benefits. 


The UK retains appeal 


Overall, the future of the UK property market is bright, said Scoular. Risk-returns should remain attractive – with geared returns of about 5% on residential property, while ungeared commercial property should offer 5-7% in a reasonably buoyant market. Scoular is also convinced the London market is set to turn. He says prime central properties could see a 25% price increase in the next five years.


While residential purchases are likely to flatten this year when the stamp duty holiday ends, the UK market will remain attractive in the long term, said Scoular, albeit with fewer foreign investors post-Brexit. Scoular said he does not believe the end of the stamp duty holiday will have a big influence on the housing market this year.

The outlook for taxes
Key points


  • A rising tax environment is inevitable. 
  • The tax system is ripe for future reform. 
  • Businesses will likely bear the burden. 
  • It may be time for individuals to re-examine their objectives. 


"There tends to be at least one surprise in every budget," said Investec Wealth & Investment's Simon Bashorun. However, what should not come as a surprise is the fact we will move into a rising tax environment. Bashorun explained that the costs of Covid-19 support packages are running high, and inflation will not be able to offset this alone. 


With more speculation than ever around tax increases, the chancellor has a difficult decision ahead regarding which taxes he can increase and in what timeframe, said Bashorun. To preserve the recovery, he will have to tread carefully. 


Slowly does it 


With three-quarters of tax revenues coming from the taxes that the Conservatives promised not to increase in their last manifesto, one of the most likely targets for the chancellor is capital gains tax. Capital Gains Tax (CGT), which was paid by only 276,000 people in 2018-2019, has attracted much speculation. Last summer, a review of CGT by the Office of Tax Simplification (OTS) suggested aligning CGT rates, which sit at 10-20%, to income tax rates, which come in at 20-45%. That would result in a significant uplift in the taxation of capital gains. 


Other suggestions included reducing the annual allowance for CGT from £12,300 to about £2,000-£4,000, and removing the uplift to CGT on death, which would discourage people from hanging on to assets in later life. Another suggestion was changing business assets disposal relief, making it harder to get the 10% exemption. 


However, Bashorun said Sunak has to be mindful abrupt changes in CGT can impact behaviours, leading people to hold on to their assets – and having the undesired effect of reducing government revenue. For this reason, he expects Sunak to make more targeted and incremental changes, such as taxation on second properties, lowering the tax-free CGT allowance and shortening the time limit for paying the CGT. He also said he foresees a warning of further CGT changes, which would give people time to dispose of their assets and bring forward government revenue.


Meanwhile, Bashorun does not expect any substantial changes to pensions tax relief. He pointed out that retrospectively changing the goalposts on retirement income would not go down well. Nevertheless, he does not rule out changes in the future, particularly on tax relief on pensions contributions, after a proper review is conducted. He suggested that the chancellor may consider stealthier ways of increasing revenues that still adhere to the spirit of his party's promise on the income tax triple lock – such as increasing the tax rate on dividends or freezing tax bands. And while reforms to inheritance tax would undoubtedly grab headlines, Bashorun also emphasised the need for a thorough review before this can be envisaged.


While the majority favours repaying higher debt levels through a wealth tax on the few, Bashorun explained that such a departure from the current tax regime would be difficult to implement, factoring in valuations and anti-avoidance measures. 


Entering a new fiscal era 


The tax system is ripe for full reform, said Bashorun. But the alignment of income tax, National Insurance and pensions tax relief requires careful consideration.


Overall, however, Bashorun explained that the tax burden is shifting away from individuals towards business. The last year has shown that levies on e-commerce businesses have been successful. And while the Conservatives had previously promised a reduction in corporation tax from 19% to 17%, the likelihood is we will see this increase towards 25%, Bashorun said.


He explained that the downward trend in corporation tax for the last 50 years meant that the UK should remain competitive internationally. Also, he said changes to corporation tax would not drive behavioural changes akin to those brought about by modifying the CGT. While an increase would be a bitter pill to swallow for some – particularly those unable to access support packages and then ask to pay for them – it will not diminish the drive for profits. 


Meanwhile, Bashorun said he does not expect to see any significant changes to personal taxes. Now is a good time for individuals to re-examine their assets and objectives, he said. It is also the time for people to raise funds by triggering gains and judiciously using the allowances and exemptions available to them – especially "use-it-or-lose-it" ones, such as ISA allowances, pension contributions and CGT exemptions.

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