Summary
Property Taxes
There is a significant impact on landlords as they would affect the purchase price and the allowable expenses they are claiming. These are:
Restriction mortgage interest deduction
When calculating rental profits, Landlords will not be able to claim the finance cost on their mortgage. The restrictions on the finance cost will be capped to:
| 2017/18 | 75% ALLOWED | 25% BASIC RATE |
| 2018/19 | 50% allowed | 50% basic rate |
| 2019/20 | 25% allowed | 75% basic rate |
| 2020/21 | Nil | 100% basic rate |
Example:
Rental income £10,000
- allowable expenses not including finance cost £2,000
- finance cost £3,000.
The tax position for a basic rate taxpayer will be as follows:
| PROFIT BEFORE FINANCE COST | FINANCE COST ALLOWED | TAXABLE PROFIT | TAX AT BASIC RATE | TAX RELIEF ON FINANCE COST | TOTAL TAX DUE | |
| CURRENT | 8,000 | 3,000 | 5,000 | 1,000 | Nil | 1,000 |
| 2017/18 | 8,000 | 2,250 | 5,750 | 1,150 | (150) | 1,000 |
| 2018/19 | 8,000 | 1,500 | 6,500 | 1,300 | (300) | 1,000 |
| 2019/20 | 8,000 | 750 | 7,250 | 1,450 | (450) | 1,000 |
| 2010/21 | 8,000 | Nil | 8,000 | 1,600 | (600) | 1,000 |
Whilst the tax liability does not change, this does not mean that the landlords tax position will remain unaffected. As the profits had increased from £5,000 to £8,000 there may be a chance that the tax payer may end up being in the higher tax position.
The tax position for a higher rate tax payer will be follows:
| PROFIT BEFORE FINANCE COST | FINANCE COST ALLOWED | TAXABLE PROFIT | TAX AT 40% RATE | TAX RELIEF ON FINANCE COST (20%) | TOTAL TAX DUE | |
| CURRENT | 8,000 | 3,000 | 5,000 | 2,000 | Nil | 2,000 |
| 2017/18 | 8,000 | 2,250 | 5,750 | 2,300 | (150) | 2,150 |
| 2018/19 | 8,000 | 1,500 | 6,500 | 2,600 | (300) | 2,300 |
| 2019/20 | 8,000 | 750 | 7,250 | 2,900 | (450) | 2,450 |
| 2010/21 | 8,000 | Nil | 8,000 | 3,200 | (600) | 2,600 |
As you can see, the tax liability will continue to increase over the year as the tax relief for finance cost is only restricted to the basic rate.
The end of wear & tear allowance
From 6 April 2016, landlords will not be able to claim the 10% wear & tear on their furnished properties. Instead landlords will only be allowed to deduct actual cost in replacing furnishing.
Example
Michael lets out a full-furnished house. The rent is £900 a month.
He plans to replace a table, an armchair and blinds in the not too distant future and expects the replacements to cost £660. No further replacements are envisaged before April 2017.
If he undertakes the replacement before 6 April 2016, he will be able to claim the wear and tear allowance of £1,080 [10% (£900 x 12)] for 2015/16. Any further costs cannot be claimed against the actual cost of replacing the furnishings and furniture.
However, if he delays making the replacement until after 5 April 2016, he can claim the wear and tear allowance of £1,080 for 2015/16. It does not matter that he has not actually spent anything on replacements. He will also be able to claim a deduction of £660 in 2016/17 for the actual cost of the replacements under the new relief. Delaying the replacement will save him tax of £120 in 2016/17, assuming that he is a basic rate taxpayer (£660 @ 20%).
Higher stamp duty land tax (SDLT) on additional property
The higher rate tax will be applied on or after 1 April 2016 for those individuals who wish to purchase additional residential properties.
| BAND | EXISTING RESIDENTIAL SDLT RATES | NEW ADDITIONAL PROPERTY SDLT RATES |
| UP TO £125K | 0% | 3% |
| £125K – £250K | 2% | 5% |
| £250K – £925K | 5% | 8% |
| £925K – £1.5M | 10% | 13% |
| OVER £1.5M | 12% | 15% |
There are four exemptions for the additional rate:
- Replacing main residential property
- Transactions that are under £40,000
- Purchasing a non-residential property
- Purchasing a bulk of at least 15 residential properties
SDLT on non-residential properties
For those who wish to purchase non-residential properties, any transactions that take place on or after 17 March 2016 SDLT will be charged at each rate on the portion of the purchase price that falls within each rate band:
The new rates and thresholds for freehold purchases and leases premiums are:
| TRANSACTION VALUE BAND | RATE |
| £0–£150,000 | 0% |
| £150,001–£250,000 | 2% |
| £250,000+ | 5% |
The new rates bands and thresholds for rent paid under a lease are:
| NET PRESENT VALUE OF RENT | RATE |
| £0–£150,000 | 0% |
| £150,001–£5,000,000 | 1% |
| £5,000,000+ | 2% |
Lifetime ISA for first home purchases
The government has introduced a new proposal that would help young savers to purchase their first time property. Individuals can save up to £4,000 per annum and the government would contribute £25% towards the contributions that has been made at the end of the tax year.
Any individuals aged between18 to 50 can make a lifetime ISA and receive this bonus.
These amounts are tax free; including the government bonus, for those saves who wish to purchase a first home worth £450,000 at any time after the 12 months of opening their account. For any other purposes, individuals can withdraw tax free from the age of 60 and onwards.
Individuals would be able to transfer their existing ISA into the Lifetime ISA to help reach their £4,000 goal in order to get the 25% bonus. During 2017/18 only, additional transfers may be made from Help to Buy ISA.
The Help to Buy ISA will be available up to 30 November 2019, and open to new contributions until 2029. Individuals can use both ISA to purchase their first home however they can only use one account for the government bonus.
Tax free allowance can be withdrawn on the condition that the saver is diagnosed with a terminal illness. Upon the death of the saver, the funds in the account will be formed as part of the estate for inheritance tax purposes. The spouse or civil partner can inherent the ISA and invest in their own ISA, on top of their own allowance.
Other ISA
From April 2017, individuals can save up to £20,000 each year. This is an increase from £15,240, therefore if individuals save up to £4,000 in the lifetime ISA then they can save up to £16,000 in other ISAs in that year.
Reduction to the Capital Gains Tax
Capital Gain Tax is to be reduced from 18% to 10% on any gains that falls within the basic rate band; and from 28% to 18% for gains that falls within the higher rate band. The only exception to these rules is those individuals who have a residential property where the tax will remain at 18% and 28% respectively. However these rates only apply if the residential properties do not qualify for private residence relief.
Entrepreneur Relief (ER) will remain the same at 10% which the individual will have a lifetime limit of £10 million.
These changes will take place on or after 6 April 2016
To help to understand how this will impact you please see an illustration below:
Jamie was a basic tax payer and has the following chargeable gains:
- Residential Property gain of £20,000
- ER gain of £55,000
- Other gains of £15,000
Residential Property gain is taxed at 18%, ER gain will be taxable at 10% and other gains will be taxed at 10%.
Entrepreneur Relief (ER) on Incorporation
On 3 December 2014 there were new rules introduced where individual had previously claimed ER on the disposal on goodwill when they had transferred the business to a related party. Related Party means when they or a member of their family held shares in the other business. The new rules were there to prevent the use of ER and therefore they would pay the capital gains tax on the normal rates of 18% or 28% rather than the 10%.
On these rules there will be a revised legislation that will be introduced in Finance Bill 2016. The new legislations would highlight that ER will be allowable to claim on any gains that had been made on goodwill on the condition that the individual would hold less than 5% of the shares in the acquiring company.
ER would also be available for those individuals who hold more than 5% of the shares or voting rights if there is an arrangement that the company would be sold to a new and independent owners.
These rules would be implemented and backdated on or after 3 December 2014
Investors Relief
The government had decided that they will extend entrepreneur relief to shareholders in an unlisted company who have held for at least three years starting from 6 April 2016; however these do not include shares held by employees or officers in the company. The lifetime limits for these gains would be £10 million.
In order to qualify for relief, a share must:
- be newly issued, having been acquired by the person making the disposal on subscription for new consideration
- be in an unlisted trading company, or unlisted holding company of trading group
- have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016
- have been held continually for a period of three years before
However it should be noted that Enterprise Investment Scheme (EIS) are exempt from Capital Gains Tax. It is unclear how this rule (which charges 10% on disposal of shares) would have an impact on the existing EIS rules. It may be that this new rule would be applying to non EIS qualifying shares.
Business & Corporation
The current corporation Tax rate is 20% and will continue until financial year beginning on 1 April 2017 where it will change to 19%. By Financial year beginning on 1 April 2020 it would be further reduced to 17%.
It had been previously been announced that there would be changes on the corporation tax payments for larger companies (i.e. those with a profit in excess of £20 million) would be brought forwards. These changes would now only come into effect for period starting on or after 1 April 2019.
Capital Allowance
Low emission cars that are entitled to 100% First Year Allowance (FYA) would be extended until April 2021.
Below table shows the emission that you would be eligible to claim:
| CURRENT ALLOWANCE | APRIL 2018 | |
| FIRST YEAR ALLOWANCE (FYA) | 75g/km | 50g/km |
| MAIN RATE | 130g/km | 110g/km |
Reform to Loss Relief
There are two new reforms on the treatment of loss relief for companies
- Any losses on or after 1 April 2017, businesses would be allowed to offset against profits from other income when carried This includes those from other group companies
- Companies that want to utilise brought forward losses, only 50% of the profits above £5 million can be offset against those
Business Rates
Small Business Rate Relief (SBRR) rateable value threshold is to be permanently doubled to £12,000 (and tapered further to £15,000) once the temporary increase had expired on 1 April 2017. The rateable value of property for the standard value would be increased to £51,000.
Director’s Overdrawn Loan
From 6 April 2016 the tax that would be charged on loans to participants will increase from 25% to 32.5%. This is in line with the increase of the dividend upper rate as this would prevent individuals of extracting values from their company other than remuneration and dividends.
Personal Tax
The Personal Allowance is set to increase to £11,500 in 2017 and there will be an increase for the higher rate threshold to £45,000.
Termination Payments
From April 2018, the first £30,000 of a termination payment is to remain tax free and free from national insurance. Any amount in excess of this may be subjected to employer’s national insurance.
Indirect Taxes
NIC Class 2
From April 2018, class 2 NIC is to be abolished, this means that there is a saving of £134 for each individual. This means that instead of paying two classes of NICs (Class 2 and Class 4), the individuals will pay just one (Class 4) in the future
The existing Class 2 and 4 NICs structure
The Proposed Class 4 NIC
