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2015 – Latest Budget Announcement – Run For The Hills!

July 9, 2015

What does it mean for property investors/developers?

By Simon Misiewicz – 27th November 2015

If you’re a property investor/developer the negative effects of the budget announcement may have made you want to run for the hills. But don’t be too quick to give up the game If you have a property specialist tax adviser/accountant there are ways to mitigate the changes.

There are a number of changes that I am going to address here:

  • Negative impact 1: Mortgage Interest Relief Capping
  • Negative impact 2:  10% wear & tear allowance removal
  • Negative Impact 3: Dividend tax above £5,000
  • Negative Impact 4: SDLT increase of 3% for properties over £40,000
  • Negative Impact 5: CGT payment within 30 days of sale

There are some positive points too:

  • Positive Impact 1: Corporation decrease from 20% to 18%
  • Positive Impact 2: Inheritance Tax nil rate allowance increase

Are you, as a property investor, going to suffer as a result? My answer to all clients I have been briefing about the outcome is… maybe and maybe not.

Book onto our free webinar (multiple dates) to get a detailed explanation of the budget announcement

Higher rate taxpayers may now pay tax on properties that make an annual loss. How can this be, you may ask? It’s all to do with the changes to mortgage interest relief announced by George Osborne in the Budget. How does this impact you? Currently property investors can claim tax relief on their mortgage interest repayments at the top level of tax they pay, meaning the highest rate income taxpayers can claim as much as 45% tax relief on the interest element of their buy to let mortgages but not in the future…

In future, this will be capped at the amount a basic rate taxpayer would receive as tax relief. The change will be introduced over four years from April 2017. In essence this means that any higher rate taxpayers will now pay more tax.

 

Currently on £3,500 of mortgage interest payments (i.e., not including any element of mortgage loan repayment) on a buy to let property:

 

  • If you pay 20% income tax then you are allowed £700 of this cost to be offset against your annual tax bill
  • If you pay 40% income tax then you are allowed £1,400 of this cost to be offset against your annual tax bill
  • If you pay 45% income tax then you are allowed £1,575 of this cost to be offset against your annual tax bill
The new proposal means that on £3,500 of mortgage interest payments on a buy to let property:
  • If you pay 20% income tax then you are allowed £700 of this cost to be offset against your annual tax bill
  • If you pay 40% income tax then you are allowed £700 of this cost to be offset against your annual tax bill
  • If you pay 45% income tax then you are allowed £700 of this cost to be offset against your annual tax bill
So, if you are a 40% income taxpayer your tax bill will rise by £700 per year (boo hiss). If you are a 45% income taxpayer your tax bill will rise by £875 per year (extra big boo hiss).

Phil Nickin from consultancy firm Deloitte said: “This measure will almost double the effective cost of borrowing for a taxpayer on the highest rate of tax. Currently interest payments of £100 only cost £55 after tax relief, but will cost £80 from 2020.”

A landlord who borrows a modest loan / mortgage might end up paying more in tax than he makes in profit.

Some experts believe the move could also force landlords to hike rents to compensate for the blow, and there is evidence this is already happening as landlords prepare for the tax changes.

Property investor Jo has:

  • £10,000 net annual rental income
  • £12,000 mortgage interest costs
  • £2,000 loss
  • £0 tax on current regime
This means Jo pays £0 tax on her rental income. In the new regime the following applies to Jo however:
  • £10,000 net annual rental income
  • £6,000 mortgage interest costs (capped at the 20% tax relief)
  • £4,000 profit
  • £1,600 tax in the new regime
Basic taxpayers who own property to be pushed into higher tax bands At the time of the above announcement on tax relief, the Government claimed that basic taxpayers with buy to let properties would be unaffected, and that only one in five landlords would be hit by the changes, however, this number has been called into question by many experts since.
In particular, the Residential Landlords Association (RLA) recently published findings of research it conducted, which suggested in fact 60% of landlords who are currently basic rate taxpayers will be pushed into higher tax bands by the changes.

Negative impact 2:  10% wear & tear allowance removal  

How does this impact you?

Another expense landlords can currently deduct from their tax bill related to furnished properties (e.g., HMOs or holiday lets) is 10% of the rent charged for wear and tear.

 John rents out a furnished property:
  • £10,000 rental income
  • £5,000 mortgage interest
  • £4,000 repair and management costs
  • £1,000 wear & tear allowance
  • £0 profit

In the above example we can see that John will not pay tax on this furnished property because of the 10% wear & tear allowance. In the future John will be taxed as follows:

  • £10,000 rental income
  • £5,000 mortgage interest
  • £4,000 repair and management costs
  • £1,000 profit
  • £400 tax at 40%

 

Negative impact no 3: Dividend tax above £5,000

George Osborne announced in his 2015 Summer Budget that the current dividend tax credit system will be replaced by a tax-free dividend allowance of £5,000. Sounds good doesn’t it?

Hold onto your hats though… This means all dividends earned outside of pensions and Isas will be tax-free up to £5,000, then taxed at 7.5% for basic rate taxpayers.

The change will have a big impact on small businesses, particularly those that pay themselves, as directors, small salaries to ensure an entitlement to state pension, taking the rest as dividends. Importantly, however, there is still an advantage of paying through dividends rather than wages because there is no need to pay National Insurance on dividends.

 

Negative Impact 4: SDLT increase of 3%

An additional 3% SDLT will be charged on purchases of additional residential properties above £40,000 The higher rates will be 3 percentage points above the current SDLT rates. The higher rates will not apply to purchases of caravans, mobile homes or houseboats, or to corporates or funds making significant investments in residential property given the role of this investment in supporting the government’s housing agenda.

For example you did not pay any SDLT on purchases of £120,000. The above change will mean that you will now pay £2,400. If you purchased a property valued at £150,000 then you would have paid 2% above the £125,000. Meaning that you would have paid just £500 SDLT.

 

These changes will mean that you will pay the £500 SDLT shown here but you will also pay 3% on anything above £40,000. This means that you will pay 3% SDLT on £110,000 (£150,000 minus £40,000) being an extra £3,300

 

Negative Impact 5: CGT payment within 30 days of sale

From April 2019  a CGT payment on disposal of residential property will be required to be made within 30 days. This will not affect gains on properties which are not liable for CGT due to Private Residence Relief. The government will publish draft legislation for consultation in 2016.

 

Positive change no 1: Corporation tax will drop to 18%

Over the next four years from the current level of 20% “Today I announce that I am cutting [corporation tax] again. Britain’s corporation tax rate will fall to 19% in 2017 and 18% in 2020,” said Osborne, in a bid to “show the world the UK is open for business”.
This was good news indeed – the UK’s corporate tax rate already compares favourably with other countries, for example, the comparable tax rate in the US is 40%, in France it’s 33.3% and in Scandinavian nations it can be as high as 50%! Howard Sears, managing director of the venture capital firm Astuta, said: “For British business, this was a frankly barnstorming budget. Confidence among UK businesses is already strong but these latest reductions in corporation tax will supercharge it.”
This means that in 2017 for every £100 profit you make in your limited company you will keep an extra £1 compared to now (woo hoo). By 2020 for every £100 of profit you make in your limited company you will keep an extra £2 compared to now (double woo hoo)! However, don’t get too excited… with one hand they give and with the other they take away!!!

 

Positive change no 2: Inheritance Tax nil rate allowance increase

From January 2017, the government will raise the inheritance tax (IHT) threshold from £325,000 per person to £500,000. Example of positive change no 2 – what it means to you This means that a married couple will be able to pass on assets worth up to £1 million, including a family home, without their inheriting family/friends paying any IHT at all. Currently, the beneficiaries of an estate must pay 40% tax on any portion of its value that exceeds the £325,000 per person. So if you have an inheritance of £1 million or more from a married couple, your inheritance tax bill has just dropped by £140,000! Phew.
The bad news is in some cases house price inflation (particularly for property investors who significantly add value to their properties) will probably outpace the IHT tax relief increase. Still £140,000 less to pay is fantastic!
Do all these changes mean you should now be buying all your properties in a limited company?
It still depends on your personal circumstances. It certainly means that the profit level you achieve per year drops a little lower as a trigger to whether or not to use a limited company rather than put your property income through self assessment.
So, how does all of this impact me as a property investor and what do I need to do now to prevent my tax bill from increasing? As you can probably imagine everyone’s personal situation is slightly different and the above tax changes need to be looked at in relation to your future plans for property investments and strategies. Most likely, however, whatever you do as a property investor, this budget will affect you and if you do nothing your tax bill will increase and in some cases increase dramatically!

Next steps:

Book onto our free webinar (multiple dates) to get a detailed explanation of the budget announcement



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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk