The Budget: Changes affecting the property market
The latest budget was announced on 8th July outlining the latest economic spending changes, several of which affect the property market, and in particular, the buy-to-let market.
Announcement: Buy-to-let taxation
Currently, individual landlords can deduct their costs – including mortgage interest – from their profits before they pay tax, giving them an advantage over other home buyers. Wealthier landlords receive tax relief at 40% and 45%. This tax relief will be restricted to 20% for all individuals by April 2020.
In addition, from April 2016, the ‘wear and tear allowance’, which allows landlords to reduce the tax they pay (regardless of whether they replace furnishings in their property) will also be replaced by a new system that only allows them to get tax relief when they replace furnishings.
The new rules will be brought in gradually from April 2017 and will affect higher rate (40%) and additional rate taxpayers (45%). Basic rate taxpayers should remain unaffected. Basic rate taxpayers are broadly those individuals with a total taxable income from all sources of up to £43,600 in 2017/18.
The changes will be added in stages with the following staging posts:
- 2017/18 – 75% of finance costs fully deductible with 25% of costs qualifying for 20% relief
- 2018/19 – 50% of finance costs fully deductible with 50% of costs qualifying for 20% relief
- 2019/20 – 25% of finance costs fully deductible with 75% of costs qualifying for 20% relief
- 2020/21 – all financing costs will be given as basic rate tax relief
There appears to be a carry forward relief mechanism but we shall need to see how this works in practice.
Orlaith Brogan, ESPC Lettings manager comments, “As the final details aren’t confirmed, it’s difficult to offer general advice, however, it is advisable to consider the ownership structure within family tax planning. It is advisable to do this in any case. Landlords could also look at cost of mortgage rearrangement prior to when the new rules are implemented in 2017/18.”
Peter Young, tax adviser for Johnston Carmichael said, “In my view, the changes are gradual and may not have a really significant impact on people’s decision making. Many of my clients are not highly geared (a problem in the past) and so loan interest relief, whilst highly valuable, is not that important, particularly whilst interest rates remain at historically low levels.”
Announcement: Wear and tear allowance
From April 2016, the government will replace the Wear and Tear Allowance with a new relief that allows all residential landlords to deduct the actual costs of replacing furnishings. Capital allowances will continue to apply for landlords of furnished holiday lets. The government will publish a technical consultation during the summer.
This spells the end of wear and tear which will mean more record keeping which could be beneficial for those who regularly require replacing furnishings.
Orlaith advises, “At present, from a tax perspective alone, it would be sensible for landlords to consider defraying major replacement of furnishings until the new rules start from April 2016. That way, they can benefit from wear and tear this year and renewals basis from next year.”
Announcement: Inheritance tax
Currently, Inheritance Tax is charged at 40% on estates over the tax-free allowance of £325,000 per person. Married couples and civil partners can pass any unused allowance on to one another.
April 2017, each individual will be offered a family home allowance so they can pass their home on to their children or grandchildren tax-free after their death. This will be phased in from 2017-18.
The family home allowance will be added to the existing £325,000 Inheritance Tax threshold, meaning the total tax-free allowance for a surviving spouse or civil partner will be up to £1 million in 2020-21.
Peter comments, “This policy is to take families out of inheritance tax where the tax is mainly due to the increase in property value. Even if the family home is sold and smaller property purchased, the nil-rate band will still be available. The allowance will gradually be phased out for estates worth more than £2 million.”
For more information contact ESPC Lettings on 0131 253 2847 or visit jcca.co.uk