An Analysis of the Budget

The budget was announced this Wednesday (26th of November) following a shambolic leak of the key policies by the Office for Budget Responsibility (OBR) 40 minutes prior to when the Chancellor was due to make her speech in the House of Commons.

That led to immediate market reaction, bond prices and sterling began moving as markets hastily executed billions of pounds of trades. Aside from that utter fiasco, there have been a series of speculation and even rumours of Reeves breaking the Labour Manifesto. That has led to tangible market impacts, in particular the housing market. 

In this article, I will outline the key takeaways from the Budget and how it will affect the operation of commercial law firms. 

Mansion tax 

Reeves announced that owners of properties valued at more than £2m are set to be hit with a surcharge of at least £2,500 from 2028. This is known as a mansion tax. The annual charge will come on top of the existing council tax, and it is dependent on the price of a property. There are four bands to the tax, the lowest band covers properties valued between £2m and £2,5m, while the highest charge of £7,500 will fall on homes valued at £5m or more.Unsurprisingly, most properties affected by this tax are situated in London. 

While this may have a direct and perhaps personal effect on some senior partners at global corporate firms, it will also impact commercial law firms with a focus on private clients. Some examples include: Mishcon de Reya, Macfarlanes, or Forsters. The private wealth and tax teams are particularly impacted by this as they will be frantically trying to figure out ways to alleviate this tax that can cost up to £75,000 in ten years.  

In fact, those about to purchase a property have found a slight loophole in the new policy. House buyers and real estate agents can agree on a price, just avoiding entering into a threshold that requires them to pay more or to pay this tax. For instance, a property that was originally to be sold at £2,000,000 could be sold at £1,999,999. Same for a property valued at £5,000,000, it could be sold at £4,999,999. This allows the buyer to completely avoid or to pay less of the mansion tax while the seller only suffers a trivial and insignificant loss. This practice is also known as ‘price bunching’. 

Capital Allowances 

Capital allowances are tax rules that allow companies to pay less tax when they spend money on things like machinery, equipment or building upgrades. When companies buy new equipment, they typically get their tax relief spread out over several years. This is a measure to increase company investments. 

However, there is now a new rule that lets companies claim 40% of the cost upfront on some items that currently only get slow, early relief. This gives businesses a quicker tax saving in the year they make the purchase, but the yearly rate for the remaining relief is being reduced 

In other words, companies get a bigger tax saving in year one, giving them a better cash flow and making some projects easier to afford. But they get smaller tax savings in later years, which slightly reduces the long-term benefit.  This mainly affects tax and transactional teams. 

Firms will have to be mindful of this new rule when advising on a big capital project that involves the purchase of new factories, data centres, equipment purchases, or warehouse expansions. If the upfront relief (40%) makes a project affordable, lawyers will have more work to do. On the other hand, if the relief is weaker for a project, clients may delay or even cancel it, resulting in less business for lawyers. 

Stamp Duty for New LSE Listings 

When a company lists its shares on the London Stock Exchange (LSE), investors buying those newly listed shares usually pay stamp duty, a 0.5% on the purchase. However small and insignificant it might appear, institutional investors investing £5m might expect to lose £25,000. 

Therefore, for the next three years (and it ends after three years), the government is removing stamp duty entirely on new London listings. This makes the LSE appeal more to investors, and it encourages more companies to list there. 

This change mainly affects corporate teams, particularly in equity capital markets. If the rule makes London listings slightly more attractive, firms could see more IPO work, more secondary raisings and more cross-border listing advice. 

However, do note, this change is rather insignificant and is not a game-changer when it comes to attracting more companies or becoming more appealing to investors. 

Concluding thoughts 

There are myriad key points that I have not covered, but these are the ones I feel most interesting and worth mentioning. Although it is still uncertain whether or not this will benefit the businesses themselves, we can rely on the fact that, amidst uncertainty, commercial law firms are the real winners.