Budget 2015: How are you affected?

Fri 24 Jul 2015

Jo White
Tax Consultant

A number of measures were announced in the Summer Budget in July that will affect landlords. Jo White looks at the key issues and how these changes may impact upon property owners:

Rent a room relief

From 6th April 2016 rent a room relief will increase to £7,500 per annum. This is the amount that a home owner can receive, tax free, from the letting of individual rooms in their home. This tax free sum was originally set at £ 4,250.

The increase will also apply where an individual rents out rooms in a guest house, B&B or similar providing it is their main home.

Restriction on mortgage interest relief for residential landlords

One cost which a landlord is able to use to reduce their taxable profits is mortgage interest. The amount of relief was based on the money borrowed, restricted to the original cost of the property, or the market value of the property when it was first let.

From 6th April 2017 a further restriction will be applied so that landlords will only receive tax relief at the basic rate of tax (20 per cent). This restriction is to be introduced gradually over a period of 4 years from this date, with the full impact being seen in 2020/21.

The tax reduction will be calculated as 20 per cent of the lower of:

  • The finance costs incurred
  • The rental profits for the year, or
  • The total income that exceeds the individual’s personal allowance in the tax year.

Excess finance costs may be carried forward where the tax reduction has been limited to 20 per cent of the property business in the tax year.

Changes for non-UK domiciled individuals

From April 2017 the government intends to bring all UK residential property held directly or indirectly by foreign domiciled individuals into charge for UK IHT, even if the individual is non-UK resident at the time of their death.

There will also be a change in the rules that means that individuals born in the UK to parents who were domiciled in the UK and have subsequently moved away, will automatically be treated as UK domiciled if they are resident in the UK, even if they intend to emigrate again at a later date.

Inheritance Tax and the family home

As widely publicised before the Budget, the Chancellor announced a new Inheritance Tax allowance that may allow many Sussex Life readers to pass on the family home free of Inheritance Tax. With the average house in West Sussex having increased in value by more than one-third in the last 11 years, this is going to be a welcome change in this area of the country.

The new allowance will apply when a family home is passed, on death, to either children or grandchildren. The additional allowance will come into effect from April 2017 initially at £100,000, increasing to £175,000 by April 2020.

By 2020, when added to the existing Inheritance Tax nil rate band of £325,000, the effect will be a combined Inheritance Tax tax-free amount for married couples of £1 million, where £350,000 or more of the value in their estates is represented by the value of a house that they do, or used to, live in. But, the benefit of this additional relief will be gradually reduced where the total value the deceased’s estate exceeds £2m, with no allowance being available for estates of more than £2.35 million. It will be possible to transfer any unused allowance to a surviving spouse or civil partner, in the same way as the existing Inheritance Tax nil rate band. The Chancellor also announced that the allowance will continue to be available if you downsize, and you still hold assets of an equivalent value on death.

At the same time as introducing the new allowance, the Chancellor announced that the Inheritance Tax nil rate band will remain frozen at £325,000 until April 2021, by which time the threshold will have been the same for some 12 years.

Owning property in a company

Over the last few years we have seen the rate of Corporation Tax reduce with a single rate of 20 per cent having been in existence since April 2015. The Chancellor announced that from April 2017 this rate will reduce further to 19 per cent and by 2020 it will be down to 18 per cent.

From April 2016 the way in which dividend income is taxed will changed. A new Dividend Allowance is to be introduced allowing £5,000 of dividend income to be received tax free. Thereafter the rate of dividend tax will be 7.5 per cent for basic rate tax payers, 32.5 per cent for higher rate tax payers and 38.1 per cent for top rate tax payers.. The dividend tax credit system currently in existence will be fully replaced by April 2017. Income extraction from a property company will therefore need to be considered when these new rules come into effect.

Owning a property personally

The tax free Personal Allowance is set to increase to £11,000 in 2016/17 (and £11,200 in 2017/18). This tax free amount is reduced for taxable income in excess of £100,000, with the Personal Allowance fully retracted for taxable income in excess of £122,000 in 2016/17.

Abolition of Wear and Tear allowance

From April 2016 it is proposed that landlords will no longer be able to claim the 10% wear and tear allowance. This is currently available where a residential property is let with enough furnishings for a tenant to simply move in and live there straight away. Whilst currently out for consultation the changes set are to remove this relief and instead landlords will only be able to claim for the costs of the expenditure incurred. The original cost of supplying the furniture is not expected to be allowed but replacing items thereafter will be. The timing of replacement furniture will be important to ensure landlords can benefit from the maximum relief.

This proposed change sees a move back to the original renewals basis which was abolished in 2013. It is unclear whether these provisions will apply to unfurnished properties but the initial feel is that it will not, in line with the current rules.