The rising level of inflation and increasing cost of living, particularly for the less well-off, are recognized in Guernsey’s 2023 Budget. The 7% uplift in the personal allowance to £13,025 far exceeds the 2.9% annual average increase over the past decade, but does no more than maintain the existing allowance in real terms.
To help offset the effect of the increased personal allowance, the Budget proposes that this and other allowances be withdrawn from those earning less than ever before, although people affected by this withdrawal are still higher earners with an income in excess of £90,000.
The lowering of this threshold is not the only proposal that asks higher earning individuals to dig deeper. For top earners, the cap applicable to the tax on an individual’s non-Guernsey source income is set to increase from £130,000 to £150,000 and the Budget calls for the cap on the tax relating to their worldwide income to be increased to £300,000. However, this is likely to affect fewer than 30 people.
It is no surprise that that the so-called “sin taxes” will once again be raised; expect a 7.5% increase in the duties levied on alcohol and an 11% hike in the excise duties applied to tobacco products. A cause for concern for motorists who are already battling rising fuel costs is the tabled 6% increase to the motor fuel duty.
More bad news for motorists is the unprecedented increase in the Vehicle First Registration Duty. This is the duty that is imposed when new and second-hand vehicles are imported and registered in Guernsey for the first time. For most vehicle classes, the rate will be doubled, with the highest band being subject to a £1,500 duty and all vehicles being required to pay some level of duty for the first time.
A member of a pension scheme (between the ages 50 and 75) may withdraw, on retirement, up to 30% of the fund value (limited to £203,000) tax-free. There is no provision for an inflationary increase to this limit, which in real terms means there is reduced relief available to those drawing down from their pensions for the first time.
A further proposal relating to pensions is one which seeks to impose a 50% tax charge on any unauthorized payments received by an individual from a pension scheme. This proposed measure should serve as a deterrent to those who intend breaching pension scheme rules.
On a small island with limited land and buildings it is little wonder that many of the proposals in the 2023 budget set their sights on properties.
During times of high inflation and rising interest rates, homeowners will welcome the one year pause in the phased withdrawal of the tax relief on mortgage interest for a principal private residence, with the maximum deduction remaining at £3,500 in 2023 instead of being reduced to £2,000 as had previously been planned. For anyone paying mortgage interest on their home, this will mean up to £300 extra in their pocket (up to £600 for a couple).
It is not good news for landlords though, as they are set to face the phasing out of mortgage interest being claimed as a deduction against rental income from domestic let property. It is proposed that individuals, companies, or other entities may only deduct 75% of their mortgage interest on let residential properties situated in the Bailiwick in 2023, reducing to 50% in 2024, 25% in 2025, and no deduction from 2026 onwards. It remains to be seen whether private landlords will seek to pass this additional cost on to their tenants in the form of increased rents.
A further cost for those looking to acquire residential property to let is the proposed 2% increase on the Document Duty on all residential property purchases which are not to be the purchaser’s principle private residence or that of a person associated with them (i.e. a family member). At a time when interest rates are exceptionally high, coupled with the phased withdrawal of mortgage interest relief for domestic let properties, it is not certain what impact this increased Document Duty will have on the housing market and the attractiveness of residential property in Guernsey as an investment.
With a short supply of family homes on the island, the 2023 budget includes an incentive for ‘down-sizing’. For those meeting the qualifying criteria and conditions, the first £400,000 of a replacement principle private residence would be charged a 0% Document Duty. This would reduce the Document Duty payable on the purchase of a property valued at £400,000 and above by £10,875. This is only a short-term incentive that is expected to end on 31 December 2024.
A divorcing couple who are moving into smaller houses will only be entitled to the Document Duty relief on one of the new properties. It will be interesting to see how this is likely to work out in practice, particularly as the measure will be applied retrospectively to purchases from 03 October 2022.
Keeping the spotlight on the availability of useful buildings in Guernsey, there is the expectation that the 2024 Budget will include two proposals aimed at promoting the development of new buildings. The first seeks to impose Tax on Real Property (‘TRP’) at five times the current rate on unoccupied buildings, and on derelict land and greenhouses. The second is to charge a rate of least five times the current “development building” tariff for buildings and sites which have planning permission for the construction of a new building, but the development has not been completed within three years.
The TRP for all commercial buildings and land tariffs for 2023 is set to increase by 7.5%.
Most homeowners will not see an increase in their TRP for 2023 as approximately 70% of homes in Guernsey have a TRP rating of less than 200 and this band has been spared in this budget. Domestic properties with a TRP rating of 200 or more can expect a TRP tariff increase of 10 to 20%, depending on their rating.
Whilst some of the measures in the Budget are clearly aimed at providing an incentive to develop residential property and thereby make housing more affordable, it must be hoped that any unintended consequences of this intervention do not have the opposite effect. Many of the other measures introduced seem intended to reflect the consequences of inflation and potentially to protect those most struggling with the cost of living at the expense of the more well-off.