The dust is beginning to settle on the Summer Budget and whilst much of the early analysis obviously related to the the big-ticket living wage and welfare plans, it is worth highlighting a couple of key property-related developments.
In effort to ‘level the playing field’ between home owners and those who buy properties to rent out, as well as raising some extra funds for the Treasury coffers and try to guard against a buy-to-let-driven overheating of the property market, the ability for landlords to offset mortgage interest against their rental income on their tax bill is to be curbed.
Currently, landlords can claim the cost of mortgage interest against their rent to reduce the amount of profit that is taxed at their marginal tax rate, i.e. the higher rate or additional rate for those with income over the thresholds of £42,385 and £150,000 respectively.
However, from April 2017, this income tax relief will be restricted to basic rate only, i.e. only 20% tax relief will be available on the interest, meaning a higher tax bill on buy-to-let property income.
Although, landlords will be subject to higher tax payable on their rental profits, it is possible that the buy-to-let market will not be significantly affected, as property investors are likely to continue to still want to invest for longer term capital growth.
Landlords themselves, particularly those with portfolios that they intend to hold for the longer term, will need to look closely at the way their affairs are structured, as it may not now automatically be the case that it is more tax efficient for properties to be held personally. The impact of restricting income tax relief for mortgage interest and lowering corporation tax rates may mean that holding the properties in a limited company structure may in some cases be the more tax-efficienct option.
In any decision however, there are other factors that need to be weighed up, for example the fact that it would be difficult to transfer an existing portfolio held personally into a limited company, as this may trigger a capital gains tax charge and because mortgage lenders may not allow such a transfer.
For new investors, just starting to build a portfolio, it may pay to start putting the properties into a limited company to begin with. This is particularly tax-efficient where the investor is borrowing to purchase some of the cost, as the rental profit can be kept in the company, attracting minimal tax and used to pay down borrowing. Conversely, however, the number of lenders that are willing to lend in this way will be smaller and the interest rates potentially higher.
This is a complex situation to evaluate now, with changes to stamp duty and to dividend taxation also playing into the equation and with different structures likely to be favourable, depending on the long term objectives of the investor, the way they are funding the purchases and the value of the property. In summary, for such a significant investment it is worth considering all options on a case-by-case basis.
The effective removal of inheritance tax on family homes worth up to £1,000,000 has been ratified and the threshold at which the tax is levied will rise for couples from £650,000 to £1,000,000 from April 2017.
At present, inheritance tax is payable at 40% on the value of an estate in excess of the tax-free allowance of £325,000 per person. Married couples and civil partners can pass the allowance on to each other, making a total allowance of £650,000 to cover their family estate. From April 2017 individuals will each be offered a further £175,000 allowance to enable them to pass property on to children tax-free after their death. This will be added to the existing £325,000 inheritance tax threshold, bringing the total transferable tax-free allowance from both parents in a married couple or civil partnership to £1,000,000.
Although this will be good news for many families, it may not be such good news for the property sector. With less of the older generation having a need to downsize and transfer some of their wealth to their children earlier, to avoid inheritance tax, more are likely to stay in their current properties. This could therefore present less opportunities for property development or refurbishment and could withhold more properties from the market for longer, reducing supply and increasing prices for buyers.