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Property round-up - Autumn Statement

The Autumn Statement includes further changes that impact upon residential property, which I will summarise and also re-cap on the forthcoming changes for buy-to-let properties.

Second home Stamp Duty Land Tax (SDLT) grab

Yet another SDLT increase! Acquisitions of additional residential properties, such as second homes and buy-to-let properties, will be subject to an additional 3% above the existing SDLT rates from 1 April 2016.

There are some exceptions: The increased rate will not apply to purchases of caravans, mobile homes or houseboats.  Corporates also escape the additional charge, which may give some opportunities ahead. However, HMRC will be consulting on whether corporates owning more than 15 residential properties will be exempt from the increased rate. Funds making significant investments in residential property are also excluded.

Buy-to-let still in business: changes to Wear and Tear Allowance and loan interest

By way of reminder, the annual 10% Wear and Tear Allowance will be replaced by a new system from April 2016.  Landlords of fully furnished property will be able to claim relief for the actual cost of replacing furnishings.

For example: George, an additional rate taxpayer, has annual rental income of £80,000.  To keep his current long term tenants happy, he plans to replace furniture at a cost of £12,000.  We compare his net profits if he incurs this expenditure before or after 6 April 2016:

  2015/16 2016/17
Rental income 80,000 80,000
Wear & Tear Allowance (8,000) -
Expenditure on furniture - (12,000)
Renal profit £72,000 £68,000

Clearly, delaying expenditure until after 5 April 2016 will be beneficial for him.

Tax relief on finance costs will also be restricted from April 2017 and phased in until fully restricted to base rate from 6 April 2020.  Looking further ahead, let’s now consider George’s profits for the year end 5 April 2021.  We assume he incurs annual mortgage interest of £36,000.

  2015/16 2020/21 Tax increase
Rental income 80,000 80,000  
Wear & Tear Allowance (8,000)    
Less interest (36,000)    
Taxable profits 36,000 80,000  
Tax at 45% 16,200 36,000  
Less interest at 20%   (7,200)  
Total Tax £16,200 £28,000 £12,600

Corporate ownership could be attractive

The finance cost restriction will not apply to corporate ownership.  Now that the increased SDLT rate may also not apply to companies, corporate ownership could again be very attractive.  The big picture needs to be considered, including profit extraction and long term exit planning.  Transfer of existing properties to a company might be possible in certain circumstances.

Good news for first time buyers

More help is announced for first time buyers to purchase their first home, in the form of an Equity Loan scheme until 2021 which creates a London Help to Buy scheme.  Under this scheme, buyers with a 5% deposit can obtain a loan of up to 40% of the value of a new build home, interest-free for a five year period.

This can be used in conjunction with the new Help to Buy ISA, which will be launched in December. First time buyers will receive a 25% bonus from the Government in their ISA up to a maximum of £3,000, which they can put towards a deposit for their first home.

If there are any property issues you would like to discuss, please contact Liz Cuthbertson or your usual Mercer & Hole contact.

 

 

Date: 26th November, 2015
Author: Liz Cuthbertson

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