By Stephen Metcalf - Private Client Tax Senior Manager at Kreston Reeves
So, the election proved rather difficult for the conservatives and Theresa May in what was a plan to in fact strengthen her hand on what are likely to be some tough policy decisions and negotiations around Brexit.
The election resulted in a hung parliament, with the Tories unable to produce a majority. They are set to govern however with a loose agreement with the Democratic Unionist Party to support them on important parliamentary votes.
So what does this all mean for tax policy, and how will landlords and others be affected?
No major tax increases?
If this minority government can survive, we would expect it only to do so without any dramatic changes to their agreed manifesto. We saw earlier this year with the planned national insurance increase announced at the Budget, that even with a majority government it is difficult to do anything outside of the manifesto.
Therefore for as long as the minority Tory government is around, we should expect much the same. This could be seen as good news from a tax perspective, with the planned tax-free personal allowances and basic rate band increases to be introduced over the next few years, without any increases to Income Tax, Capital Gains Tax or VAT. For landlords this unfortunately also means that the deeply unpopular tax relief restriction on mortgage interest is expected to survive, with the gradual implementation continuing from now through until April 2020 when the full restriction is in place.
There are however social issues, such as elderly care and improving schools, which have been talked about and will have to be paid for. The Tories intend to do this with a continued austerity drive to reduce costs, rather than increase taxes. Local housing allowance rates have been under immense pressure in recent times and this is likely to remain - with Tories committed to freezing these allowances further, making it harder for local councils to fund.
Making Tax Digital – “MTD”?
Another significant concern for many small businesses and landlords is the introduction of quarterly reporting of income and expenses online, as part of a wider drive under the guise of “making tax digital” to bring tax compliance into the modern age, with the stated aim of simplifying and improving the information flow between taxpayers and HMRC.
Due to start from 6 April 2018, with the first quarterly report due by 5 August 2018, some respite was given in the Budget for those business owners and landlords with turnover of less than the VAT threshold (currently £85,000) to start a year later. However the snap Election got in the way of some important MTD legislation casting some doubt over the timing of these new requirements.
One immediate concern is that Jane Ellison MP, the appointed lead for MTD, lost her seat in Battersea. Will this lead to further uncertainty and delay over the implementation of MTD, whilst her replacement is found and briefed?
But what if……..
If Theresa May and the DUP cannot make the government work in the near future, it is entirely possible that Labour see an ever-increasing popularity around their policies.
A stark contrast to the Conservative manifesto of cost cutting to fund increasing social costs, the Labour manifesto was clear in its intention to raise taxes to their highest peacetime level, with a firm commitment to increase spending on many areas including schools and university tuition, the NHS and social care.
So what would a first Labour budget in over seven years look like?
Income Tax increases for individuals earning more than £80,000. They will face the top rate of tax of 45% (currently paid only by individuals with income of more than £150,000), with a new rate of tax of 50% for those earning over £123,000.
This will potentially increase the impact of the mortgage restriction relief changes, where landlords who under old rules determined their level of profits after interest paid will now have to calculate profits before finance costs, such that someone receiving £90,000 total rents with mortgage interest costs of £50,000 would face a tax rate of 45% instead of 20% under the pre April 2016 rules.
Those who have considered moving their rental portfolio into a Limited company to take advantage of lower corporation tax rates might also be disappointed with the intended increase to 26%, compared with a stated aim under the Tories of reducing to 17%. More number crunching will be required to understand the advantages and disadvantages of operating under different entities.
Inheritance Tax (IHT) increases back on the agenda, with Labour intending on halving the current tax-free thresholds applicable to married couples. Those with significant property interests will argue that IHT has increased over the last eight years without this further attack, due to a lack of tax-free threshold increases compared with significant growth in property values during that time anyway.
Whilst not spelled out in the Labour manifesto itself, Jeremy Corbyn had mentioned early in the election campaign that recent Capital Gains Tax (CGT) rate cuts would be reversed to pay for extra policing. Of course, there was no cut to residential property CGT (this remaining at 28% for higher rate taxpayers), so this might not impact landlords, although under previous Labour governments we have seen CGT rates equal to Income Tax levels which would involve a great increase.
On the flip side, expect a Labour Government to support those with housing needs, which might assist in pushing up rental rates. Labour have also suggested that they will push for 3 year tenancy agreements which, whilst aimed at helping tenants, will possibly reduce risk and uncertainty for landlords as well.
Tax is ever changing and evolving, with at least one Budget each year with the potential to change significant legislation each time. It is normal for there to be both winners and losers out of any Budget changes. Many feel that landlords have been on a losing streak in recent years under Tory guidance, and arguably this would continue under a Labour Government.
The great unknown for all is the Brexit impact – if things go well on negotiations, would the economy start to see improvements for all, such that tax levels could be cut, or will we see an expensive exit that will make current spending commitments and tax levels completely unsustainable?
For more specialist tax advice please contact Kreston Reeves.