With next weeks Budget nearly upon us we recap on the bad news brought in 2015 by the Chancellor and hope that 2016 is more positive for buy to let landlords!
Interest rate relief
The Summer Budget contained a couple of unwelcome surprises for property investors, the Chancellor announced a restriction on tax relief for interest payments as well as a removal of the popular wear and tear allowance.
Previously investors have been able to claim a tax deduction for interest suffered on their buy to let property against rental income received. Some people did feel that this treatment was overly generous when a first time buyer, struggling to raise a deposit, does not receive the same benefit. However, it is very probable that this restriction will be passed on to tenants in the form of increased rents!
From April 2017 the relief will be restricted on a gradual basis, until the tax year commencing April 2020 where relief will only be available at the basic tax rate of 20%. Currently additional rate taxpayers effectively receive 45% tax relief on the interest. This means that £100 of mortgage interest currently costs them just £55 after claiming tax relief, but this cost will rise to £80 when the changes are fully implemented.
New calculation can create tax on losses
The mechanism for claiming the relief will also change. Instead of being included as a straight deduction as part of the property business calculation, the interest amount will effectively become an income tax reducer, and will be deducted from the total income tax liability, including the tax due on the property income.
This tax reduction will be calculated as 20% of the lower of the:
- finance costs not deducted from income in the tax year
- profits of the property business in the tax year
- total income (excluding savings income and dividend income) that exceeds the personal allowance in the tax year
Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.
This revised mechanism moves us closer to a tax on rental turnover and can mean that tax is payable even where there is a genuine commercial loss!
But its not over yet…
Of all the proposed changes this has been the most unpopular and potentially will have the biggest impact on landlords. At the turn of the year two tax payers raised £50,000 in a week through crowdfunding to fight these changes, and in February Cherie Blair agreed to take their case to HMRC. All is not lost, so we shall watch this space.
Removal of wear and tear allowance
The Government have also announced their intention to remove the wear and tear allowance from April 2016. This allowance is currently available to investors holding residential furnished property and, in broad terms, provides a tax deduction at 10% of the value of rental income received in the tax year. The allowance will be replaced with a tax deduction for the cost of replacement items. The emphasis is on the tax relief reflecting the economic impact on the investor, so relief will be reduced by any proceeds received for the old items, and it will be available on partly furnished properties, as opposed to the wear and tear allowance which was just for fully furnished properties.
In recent years there has been some confusion about the tax rules in this area, and it appears that the Government can’t see the wood for the trees. Tax relief was originally allowed as either the 10% allowance or on a replacement basis. This was on a concessionary basis, but then when written into legislation in 2013 the replacement basis became more restricted in its application. Now it appears that a u-turn is being made with the removal of the allowance.
Whether this is economically detrimental to individual landlords will depend on their exact circumstances and how often they refurbish their properties! HMRC do not expect it to impact their tax receipts. However, it is clear that the wear and tear allowance was much simpler to claim and will be missed from this perspective at least. It is therefore questionable whether the costs of consultation and of implementing the new rules are a good use of taxpayer money.
SDLT increases on second property
There was further bad news for individuals purchasing buy to let property in the Autumn statement.
The government announced that higher rates of SDLT will be charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes, from 1 April 2016.
The higher rates will be 3 percentage points above the current SDLT rates. Affected investors will suffer SDLT of 8% on the element of purchases above £250,000 when the changes take effect. This measure will particularly affect buy to let investors in the South East where properties tend to be more expensive.
The exact detail of these rules is currently subject to consultation and we expect to hear more immediately following the budget next week.
It was also announced that from April 2019, a payment on account of any CGT due on the disposal of residential property will be required to be made within 30 days of the completion of the disposal. This can significantly accelerate tax liabilities going forward. As an example, a disposal made at the start of May 2019 will potentially be due in the same month under the new rules, whereas previously this would have been delayed to January 2021.
The combination of provisions announced in 2015, will lead many to feel that they are being unfairly attacked by a government which sees them as a soft target. Some may now start to consider whether holding property in a company is a better option, although transferring existing owned property can be also be expensive from a tax point of view.
The government will be hoping that these provisions play a role in cooling down the property market, and make homes more affordable for first time buyers. However, it is also likely that an unintended side effect will be a negative impact on tenants, who may find their landlords passing on the additional tax burden in rent increases!
Finally, lets end on a positive note. In January the land registry office reported a year on year growth of residential property across England and Wales of 7.1% and 13.9% in London. So lets be happy about that!
For more information or to discuss the tax implications for your business, contact the Property & construction sector head Ralph Mitchison.
Read more about Menzies Property & construction sector services.