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The Chancellor has certainly been giving landlords a rough time over the last 12 months and some might say the future of property as a viable investment looks bleaker with every announcement. Having said that, there is also the notion that the changes announced are merely ‘economical sense’ and put the options available to investors on a more even keel.
After all, if you took out a loan to invest in an ISA, you wouldn’t expect to get tax relief on the interest on that loan. However an ISA is of course a significantly more liquid investment as opposed to the long term nature of a property investment.
I will make no political argument either way other than to say that as usual Tax has got significantly more complicated in the light of the recent Budget. The changes to Capital Gains Tax (CGT) rates alone leave the mind somewhat mystified!
The first blow to landlords came in the Summer 2015 Budget when the plans to restrict Tax relief on financing costs were announced. The Autumn Statement gave a second blow with the introduction of a 3% supplement on Stamp Duty Land Tax (SDLT) for purchases of second properties. The recent Budget gave one last twist of the knife when it announced the new lower rates of CGT would not apply to dwellings.
I thought it would be useful to provide a recap of the changes that are now in place and also a summary of what is coming in next year:
Purchases of second homes and buy-to lets will now be subject to a 3% surcharge. This change came in on 1 April 2016 and will apply unless contracts were exchanged prior to 25 November 2015.
The test for the surcharge is whether the purchaser owns more than one property at midnight on the day of completion; if they do then the surcharge will apply. The only exclusion from this is if the property you are buying is under £40,000 or if it replaces a main residence that has been sold.
If you buy the new residence before your previous main residence is sold, you will have to pay the surcharge however if you’re previous residence is sold within 36 months of the purchase you can reclaim the surcharge. This is slightly more generous than the 18 month period that was originally announced.
The relief for replacement of a main residence requires careful consideration for those who own and have lived in a number of properties.
The annual 10% Wear and Tear allowance for landlords of furnished properties has been scrapped with effect from April 2016. Instead the renewables rules have been brought back in, this means that the original cost of furnishings cannot be claimed but any replacement costs can. Interestingly the replacement rules apply to all let properties, even those just partly furnished.
Landlords will now be required to keep receipts and records of furnishings that are replaced and only actual costs incurred can be claimed.
Tax relief on mortgage interest will be limited to 20%; this change is being phased in from April 2017. This gives landlords who are likely to be affected a Tax Year window of opportunity to plan for the changes. Higher rate tax payers are not the only ones affected; if adding back the interest to your rental profit would put you into higher rate then this will affect you too. Finance costs will be significant for many property investors therefore this could potentially be the biggest issue landlords will face. The solution could, in some cases, be to incorporate as the restrictions to tax relief do not apply to Corporates. There are a number of issues to be considered as to whether incorporation is an option; a simpler route for those with a number of properties might be to sell one property to reduce the finance costs on the others.
Many property investors have been buying property in March to avoid the 3% SDLT surcharge however how many will need to reconsider that purchase in a few years time when the restrictions on interest relief really start to bite?
The Chancellor’s announcement that he was cutting the CGT rates to 10% and 20% will have been welcomed by many investors, what he left for the small print was that these rates will not apply to dwelling houses that are not covered by the main residence CGT exemption. Therefore let properties will remain liable to CGT at the higher rates of 18% and 28%.
There are now four CGT rates in place which apply in various circumstances. Tax simplification at its best!
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