As part of its election manifesto, the Conservative Party promised to increase home ownership and support working people through its promises on personal tax. Here we take a look at what the Government is doing to make good on those promises as well as some important changes for residential landlords announced at the Summer Budget.
Changes affecting landlords
With effect from 6 April 2017, a new regime will be introduced which restricts income tax relief for finance costs associated with residential properties. Under this new regime, affected landlords will no longer be able to claim a deduction for finance costs. Instead, they will be able to claim a tax reduction of up to 20% of these costs. The effect of this regime is to restrict the tax relief available to the basic rate of income tax.
The new regime will be phased in so that, from 2017/18, 75% of the landlord’s finance costs will be fully deductible with 25% subject to the new regime. Thereafter, those proportions will be 50:50 in 2018/19 and 25:75 in 2019/20, so that all finance costs will be within the new regime from 2020/21.
As a result of these changes, we expect to see more interest in corporate ownership (especially given the reduction in corporation tax announced in the Summer Budget – see below) as well as a preference for investment in commercial property.
These changes will not apply to furnished holiday lets. It is not clear at present how these changes will impact upon trusts.
Other changes affecting landlords include:
- the replacement of the wear & tear allowance, with effect from April 2016, with a new regime (see below); and
- the annual rent-a-room relief will be increased from £4,250 per annum to £7,500 from 6 April 2016.
Supporting Home Ownership
The Government has indicated that it will support home ownership by:
- extending the right to buy to tenants of housing associations – housing stock will be replenished by requiring local authorities to sell more expensive properties in favour of acquiring multiple cheaper properties;
- building 200,000 starter homes exclusively for first time buyers under 40 – these will be offered for a sale at a 20% discount from market value;
- extending the Help to Buy loan scheme and the Help to Buy mortgage guarantee scheme as well as taking forward a Right to Build initiative; and
- prioritising Brownfield development by requiring local authorities to keep a register of their Brownfield sites and ensure that 90% of suitable sites have planning permission for housing by 2020.
Personal & Business Taxes
The Government has committed to freeze rates of income tax (on salaries and earned income), national insurance and VAT for the remainder of the current Parliament. However, in a surprise announcement, the taxation of dividend income will be reformed. With effect from 6 April 2016, the dividend tax credit will be abolished in favour of a £5,000 tax free dividend allowance and new increased effective rates of tax on dividends will be introduced (7.5%, 32.5% and 38.1%).
The Government has committed to increase the personal allowance to £12,500 and the higher rate threshold to £50,000 by the end of the current Parliament. To that end, George Osborne has announced that:
- the personal allowance will be increased to £11,000 in 2016/17 and again to £11,200 in 2017/18;
- the basic rate band in 2016/17 will be £32,000 so that the higher rate threshold is increased to a maximum of £43,000; and
- the basic rate band in 2017/18 will be £32,400 so that the higher rate threshold is increased to a maximum of £43,000.
In another Summer Budget surprise, the corporation tax rate will also be reduced to 19% in April 2017 and again to 18% in April 2020.
Inheritance Tax Changes
In line with the Government’s earlier commitment to an extension of inheritance tax (IHT) relief, the Chancellor has announced more details of proposals to exclude the family home from the scope of IHT. With effect from 2017/18, a new IHT exemption will be introduced to cover the family home provided that the property is transferred to either the deceased’s children or remoter issue. If the allowance is unused, it can be transferred to a surviving spouse.
The exemption will initially be set at £100,000 per person and will increase by £25,000 per annum until it reaches £175,000. However, there will be a tapered withdrawal of the exemption for estates with a net value of more than £2million. There will also be provisions which ensure that families are not prejudiced when a parent chooses to downsize or sell the family home.
What these changes mean is that, with effect from 2020/21, a couple will be able to pass a maximum of £1 million to their children and remoter issue without any IHT charge.
Other changes to IHT include a further restriction of the tax benefits enjoyed by non-domiciles. With effect from April 2017, new measures will be introduced which will ensure that all UK residential property held directly or indirectly by foreign domiciled persons will be brought within the charge to UK inheritance tax. This will be the case even where the property is owned through an indirect structure such as an offshore company, partnership or excluded property trust. A detailed consultation on these changes will follow later this year.
Other notable announcements
- There is a suggestion in the party manifesto that landlords will in future be required to check the immigration status of their tenants as part of the strengthening and enforcement of the immigration rules.
- As part of the Government’s welfare reforms, rents for social housing in England will be reduced by 1% a year for 4 years and social housing tenants with household incomes of over £40,000 in London, and over £30,000 elsewhere, will be required to pay a market rate for their accommodation in order to remain in the property. The Government believes that this could raise hundreds of millions of pounds in additional rental income for Housing Associations which can then be used to reinvest in new housing.
- The Government is also running a wide-ranging review of business rates which will be completed by the end of 2015.
If you would like to know more about any of the announcements discussed above, please let us know.
Consultation on Replacement Furniture Relief
Following the Chancellor’s recent announcement that the wear and tear allowance would be replaced with effect from April 2016, here we outline the new proposals being put forward by the Government.
The Government has outlined various concerns with the existing regime:
- wear and tear allowance is available regardless of whether any costs have actually been incurred;
- the calculation of the allowance (i.e. based on rental income received) disproportionately favoured landlords in high rental areas even though their actual costs incurred might be the same as a landlord elsewhere; and
- the allowance was only available to landlords with fully furnished properties – there has always been a question of what actually constituted fully furnished for this purpose .
Under the new proposals, replacement furniture relief will be available to all landlords of unfurnished, part furnished and fully-furnished dwellings. This will remove the need to determine whether the property is fully furnished.
The new relief will be limited to the actual capital costs incurred in replacing furniture, furnishings, appliance and kitchenware provided for the tenant’s use in the dwelling. It will not therefore extend to other items used for the purpose of the property rental business (e.g. cars) and it will not include the initial fit out costs.
One benefit of this new approach is the alignment of furnishings with the treatment of replacement fixtures which have always been allowable as a repair. Since both the replacement of fixtures and furnishings will now qualify for tax relief, landlords will no longer need to determine whether an item is a fixture.
The new relief will be restricted in two ways:
- any claim for relief will be reduced by any proceeds received for the item which is being replaced; and
- any element of the replacement cost which represents an improvement will not be eligible for relief. HMRC gives the following example of a washer replaced with a washer dryer which HMRC considers to be an improvement: If the washer dryer costs £600 but a new comparable washer would have been £400, then the replacement furniture relief is limited to £400. The balance of £200 represents the cost of improvement.
The consultation paper is available via www.gov.uk and is open for responses until 9 October 2015. If you have any questions or comments regarding the proposed changes, please let us know.
FRS102 – An opportunity to boost your balance sheet
FRS102 is bringing about potentially significant changes to the way large and medium sized companies present their financial information. Here we look at the ways the transition to FRS102 may be beneficial in terms of property, plant and equipment.
FRS102 sets out how an entity should measure its property, plant and equipment (tangible fixed assets) both on initial recognition of an asset and on subsequent measurement.
Under FRS102 a company can choose either a cost or revaluation model for particular classes of assets. Where companies choose the revaluation model, then the revaluation should be kept up to date at each reporting date. Where companies choose the cost model, there is a one-off opportunity at the date of transition to FRS102 to revalue items of property, plant and equipment (typically, but not exclusively, property) and treat the revaluation as the deemed cost of the asset. The valuation can either be at the date of transition or a previous revaluation recognised under previous UK GAAP. Subsequently, this deemed cost will not be amended other than for additions and disposals in the future years.
Where a revaluation is treated as deemed cost, provision will also need to be made for deferred taxation based on the asset being sold for its revalued amount. This was not generally the case for revaluations under previous UK GAAP.
Historically, there has been the option to adopt a policy of revaluation for a certain class of assets and this has always been a very attractive means of bolstering the balance sheet. However, the need to formally update these valuations every five years with an interim valuation every third year was often considered too costly to adopt such a policy. This is where the FRS102 transitional rules provide a helping hand.
On transition to FRS102, companies that have not previously adopted a revaluation policy will be permitted, if they wish, to undertake a one off revaluation to fair value and treat this as deemed cost. The result is an uplifted balance sheet (net of deferred tax) without the added costs and inconvenience of having to keep the valuation up to date in the future.
In order to take advantage of the transitional arrangements, it is important that you properly consider the options as soon as possible. If you have any questions about FRS102 or you want to know more, please get in touch.
National Insurance for Landlords..?
It has long been the understanding, following the case of Rashid v Garcia in 2002, that landlords and property investors were not subject to national insurance of any kind. However, in recent years, HMRC has sought to challenge this view in relation to Class 2 National Insurance Contributions (NICs).
The issue has arisen because of the different definitions previously used to determine liability to Class 2 and Class 4 NICs. Class 4 NICs is a charge on profits arising from a trading business. In contrast, Class 2 NICs were levied on profits arising from any self-employed business. Recent case law has established that property rental and property investment do not amount to trading but it could amount to a business. The lack of the word ‘trading’ in this legislation is therefore an important distinction and is behind HMRC’s recent decision to issue Class 2 NICs demands to a number of landlords with several properties.
Whilst there was concern within the tax profession as to the validity of these demands, the problem appeared to be time limited due to changes being made to the collection of Class 2 NICs. With effect from 6 April 2015, Class 2 NICs will be collected via self-assessment and abolished altogether if the Government keeps its pre-election promise. To provide for the move to self-assessment, the National Insurance Contributions Act 2015 amended the rules on liability to provide that Class 2 NICs are payable only by self-employed earners with profits subject to Class 4 NICs. In other words, this change limited liability for Class 2 NICs to those with trading businesses.
It is therefore surprising that HMRC has recently issued new guidance indicating that landlords and property investors could be subject to Class 2 NICs if they are running a business. HMRC suggests that having multiple properties, actively looking to acquire new properties and providing additional services (other than those usually provided by a landlord) could be indicative of operating a business.
If you would like to know more about NICs and the changes being made, please get in touch.
