There were a few major shocks for landlords in the budget yesterday.
An initial summary is below but further details will feature at our Property Conference. Book your tickets here for FREE.
Perhaps the biggest was that landlords who are higher-rate taxpayers or additional rate taxpayers will no longer be able to deduct all of their interest costs from their property income. The relief will instead interest be restricted to the basic rate of income tax. Currently this is only planned to affect residential properties and only individuals (ie not companies that own property).
The change will be introduced gradually from 6 April 2017 and will be phased in.
Interest deductions from property income will be restricted to:
- 75% for 2017/18
- 50% for 2018/19
- 25% for 2019/20
- 0% for 2020/21 and beyond
Individuals will then generally be able to claim a reduction in their income tax bill at the 20% basic rate for the interest costs not allowed as a deduction.
In practice this is likely to mean that landlords could have a cash deficit position at the end of a tax year but still have a taxable profit. That taxable profit will attract a tax liability which will have to be met from other sources!
In a move which if nothing else gives some clarity the 10% wear and tear allowance will be replaced with a new relief that allows all residential landlords to only deduct the actual costs of replacing furnishings. This will come in from April 2016.
This will be a welcome change for those with unfurnished properties who are the moment have no way to claim relief for any furnishings that they spend money on (curtains, blinds, carpets, white goods etc) but is a major disappointment for those with the furnished properties as the relief meant that record keeping was easier as well as the relief itself being quite generous!
Capital allowances will continue to be the only way that furnished holiday let landlords claim their relief for furnishings.
Rent A Room
Rent-a-room relief will be increased from £4,250 to £7,500 a year from April 2016.
Income Tax Rates
In 2016/17 the personal allowance will increase by £400 to £11,000.
In 2016/17 the higher rate threshold will be increased from £42,385 to £43,000 and the national insurance upper earnings limit will also increase to remain aligned with the higher rate threshold.
The corporation tax rate will be cut to 19% in 2017 and 18% in 2020.
From April 2016, the national insurance employment allowance will be increased from £2,000 to £3,000 a year.
From April 2016, companies where the director is the sole employee will no longer be able to claim the employment allowance.
The permanent level of the annual investment allowance will be increased to £200,000 for all qualifying investment in plant and machinery made on or after 1 January 2016.
This was the second shock announcement in the Budget and is bad news for pretty much every small company owner. It also significantly changes the decision making process for those considering whether to own property investments through a limited company.
From April 2016 the government will abolish the dividend tax credit and replace it with a new £5,000 tax-free dividend allowance of £5,000 per year.
The tax rates for dividends will then be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
This is on top of the 20% tax paid by the company.
Most owners of property investment companies already have higher overall taxes than individual owners and this only serves to make that position worse still.
There are still some good reasons for company ownership of buy to lets but taxation was at best a dubious ( and often completely misunderstood!) one before the changes and as a result of the budget it is very much now a real blow.
From April 2017, anybody who has been resident in the UK for more than 15 of the past 20 tax years will be deemed UK-domiciled for tax purposes.
Also from April 2017 the government will introduce new rules so that everybody who owns residential property in the UK and would otherwise pay inheritance tax on that property cannot avoid paying it by holding it in an offshore structure.
From April 2017 a new transferable nil-rate band will be introduced for family homes. This will apply when a main residence is given to direct descendants, e.g. children or grandchildren. The allowance will be up to £100,000 in 2017/18, rising to up to £175,000 in 2020/21.
This is in addition to the £325,000 inheritance tax nil-rate band, creating an effective £500,000 inheritance tax threshold in 2020/21.
Note that many commentators and budget summaries are getting this wrong and are incorrectly quoting a £175,000 allowance from 2017/18!
As with the regular nil-rate band, any unused main residence nil-rate band can be transferred to your spouse, producing an effective inheritance tax threshold of £1 million by 2020/21.
Fortunately for those who downsize the allowances will still be available on other assets. As such someone who downsizes to a home worth £100,000 could eventually leave the home and an additional £75,000 of tax-free assets to their children.
Those most likely to have a home worth £1m will not benefit however as the new allowance is reduced for estates with a net value of more than £2 million.
The Government is restricting the annual allowance (normally £40,000) for those with income over £150,000. This change will take effect from April 2016. Note that property income is not classed as earnings for pension purposes but all UK taxpayers can make gross pension contributions of £3,600 per annum regardless of their earnings.
At the moment it is not clear whether this will help with the restriction of loan interest but if the new restrictions works in a similar way to others already in place in other areas then it could provide some relief.
Help to Buy ISAs
Help to Buy ISAs will be available for first time buyers to start saving into from 1 December 2015.
From 6 April 2016 the ISA rules are being changed to allow individuals to withdraw and replace money from their cash ISA in-year without this replacement counting towards their annual ISA subscription limit. This policy will also cover cash held in stocks and shares ISAs.
This is a significant budget for all property investors. It dramatically changes the landscape and all investors will do well to consider in detail how this will affect their plans. It will, if the finance bill is unchanged, mean that some will have tax to pay even though they are not making a profit!