Commentary

Not content with lending billions to the banks and bailing out Northern Rock, the UK government has set its sights on homeowners who are struggling to pay their mortgages.

According to the BBC:

Homeowners will have enough support to ensure that their homes are not repossessed, the government says. The comments came after key mortgage industry figures met Chancellor Alistair Darling and Housing Minister Caroline Flint at 11 Downing Street. But ministers did not outline how they would stop people losing their homes.

There are two ways to read this news: cynically, and angrily.
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Remember when Mervyn King, Governor of the Bank of England, was all about applying ‘Moral Hazard’ to the banking system? You know, the idea that some banks had to fail to teach others not to make dodgy lending decisions? You can be sure King remembers making statements on risky lending like this:

“The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior. That encourages excessive risk-taking, and sows the seeds of a future financial crisis.”

Ah well, six months is a very long time in a credit crisis. One winter of discontent later, and Merv the Swerve has done a U-Turn, with the Bank announcing today its much-mooted Bring-and-Buy-a-Bond sale.

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The newspapers are full of stories about the rapid inflation in basic foodstuffs like rice and potatoes. We’re warned of social unrest, new global inequalities, and even the selfishness of speculation (which you can engage in via an agricultural ETF, although I prefer to think of it as insurance against my escalating grocery bill).

Yet ironically, the other economic story making headlines in the UK this week is the tiny fall seen so far in house prices, which comes after a tripling of prices in little over a decade. When it comes to houses, we’re told, stupidly high prices are good.

After an initially reasonable response, PM Gordon Brown has been spooked into promising he will do all he can (which hopefully won’t be much) to halt the decline. Property pundits are ringing their hands about a looming crash even as they phone their estate agents to sell, and banks and building societies are warning that the end of civilisation is but a repossession away.

But consider this: why are rising food prices bad, yet falling house prices not good? We all need somewhere to live, just as we need to eat. Surely we should rejoice that prices are coming down, given all the woes of first-time buyers unable to afford a shoebox on the edge of town, the twenty-somethings unable to leave home, and so on?

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Things are looking ever gloomier for those who see the latest stalling in house price acceleration as more a speed bump then a socking great wall being hit by a Great British love affair that’s been drunk at the wheel for years.

According to the latest Royal Institute for Chartered Surveyors (RICS) survey for March:

The balance of Chartered Surveyors reporting house prices falls increased to an historical low in March.

However, a lack of new supply is still preventing significant price falls despite rising stock levels, says RICS.

The RICS house price balance dropped for the eighth month in succession.

78.5% more Chartered Surveyors reported a fall than a rise in house prices, an increase from 65.7% in February.

This figure has exceeded the historical low of June 1990, when 64.5% more Chartered Surveyors reported a fall in house prices and is now the lowest figure since the survey began in 1978.

The regional picture is even more depressed.

In the East Midlands 89% more Chartered Surveyors reported a fall than a rise in house prices and a net 86% reported falls in East Anglia.

Scotland is the only UK region with the net balance of surveyors reporting price rises. That’s devolution for you.

Andy Brough, manager of the Schroder UK Mid 250 Fund, sounds pretty upbeat in this interesting commentary on the state of the market:

Not quite sure why they had to interview him in an oil sheik’s bathroom…Still, there is something reassuringly blokey about Brough, given that the man in charge of billions (and undoubtedly worth millions himself). Note though that Brough has sounded upbeat for a bit, even as shares have fallen further.Back in January he pointed out in The Telegraph that some people were certainly seeing value in companies at these prices - the financial directors at the leading companies themselves:

Well financed companies, together with directors, are taking advantage of the shake-out to acquire shares.

Among directors, there are 11 buys for every one sell, while companies themselves are buying back between £100m and £200m of their shares daily. On average, that is £2.25bn a month, which, put in context, is like removing the 100th largest company in the UK stock market every single month. Corporate activity, previously led by the venture capitalists, is now being led by companies themselves.

Four FTSE 100 stocks (ICI, Resolution, Kelda and Scottish & Newcastle) have all received cash bids that total around £20bn and buyers are now focusing on some of the smaller companies, with Whatman, GCap and Forth Ports seeing interest from potential buyers.

Are UK shares a bargain? Brough’s Mid Cap hunting ground has certainly fallen further and harder than the FTSE 100, and overall UK shares are on lower P/E ratings than in the US, where the market still seems to expect profits to hold up despite the credit crisis and housing falls.

GE on Wall Street sent the markets down with a profit downgrade last Thursday, and it’s very hard to believe it’s the last; Brough’s views do seem to assume we muddle through without the financial sector woes sending the wider economy into recession.

This is the last in my series on changes to UK taxation.

Gains on AIM shares now taxed at 18%

This is more a sting in the tail of the changes to the Capital Gains Tax (CGT) regime we looked at earlier in the week than a wholly new rule.
AIM shares are listed on the Alternative Investment Market. Since most AIM shares were classed as business assets, it used to be possible to pay less Capital Gains tax on gains, provided you held the shares for two years to qualify for the 10% business assets tax rate.

Now all Capital Gains (bar the first £1million that qualify under the special Entrepreneur’s Relief scheme) are taxed at a flat 18%, AIM shares no longer have any special CGT advantage over FTSE 100 shares.

Make a £100 gain on any shares outside of your personal CGT allowance , and you’ll pay 18% tax, whatever the shares you sell. Hardly a way of encouraging money to flow to the riskier start-up businesses that tend to predominate on AIM, but then that hasn’t been on the agenda for a few years now.

AIM shares still have an inheritance tax perk

It is still possible to use AIM shares to reduce inheritance tax. But with the inheritance tax threshold having risen to £600,000 for couples, the number of people who will benefit from doing so won’t be great, especially as most UK wealth is tied up in housing; you can hardly live in a portfolio of AIM shares before you pop your clogs.

Everything you could want to know about UK tax (and much, MUCH more) is available on the Government’s official tax pages. Why not instead subscribe to Monevator to keep cutting to the chase?

This post is one of a series on the changes to the UK personal tax regime introduced in the 2008/09 financial year.

All Capital Gains Tax charged at 18%

We all have a personal allowance, currently £9,600 (and distinct from your personal income tax allowance) before Capital Gains Tax is due. You are also allowed to dispose of personal goods of up to £6,000 every year, and generally your main home is free of Capital Gains tax as well.

After that, you’ll be charged on gains at 18%.

Rarely has a new law seemed so sensible, yet so widely derided by the press and public, as the rushed implementation of this flat Capital Gains Tax (CGT) regime.

The idea of a single, flat rate of CGT has much to commend it. Having a hodge podge of rates for AIM shares, business assets, and investments held for different periods of time was a pain in the posterior neck.

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Just when peer-to-peer bank Zopa was getting interesting again thanks to higher rates, it’s somewhat annoyingly announced plans to limit the kinds of loans you can make with your savings.

The new regime will see one, two and four-year loan terms scrapped, with only 36 or 60 month loans being offered to borrowers. This means you can no longer lock away your money as a lender for just a year or two in the normal market, although the ‘listings’ market, where you deal with individuals, will still offer the old flexibility.

Zopa claims the move will streamline the business for both lenders and borrowers. It believes too many lenders are put off by all the different fiddly options, and argues that the 36 and 60 month terms make for more attractive lending.

I’m uncomfortable however with the idea of locking myself into such a novel business model for three years or more, so I’ll probably not increase my Zopa lending as planned, at least not until these changes are digested by the Zopa community.

The full message from Zopa is as follows:

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This is the third article in a series on the key UK personal tax changes from April 2008. For the others, please see the introduction.

Basic rate of income tax has been cut to 20%

At last, something to cheer about! The world economy is in turmoil, banks are going belly up, and stock markets are falling, but at least this year will see most UK employees paying less income tax. The exceptions are lower-paid workers who are more affected by the scrapping of the 10% tax band we covered yesterday than by any gain from the cut in basic rate tax.

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