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Stamp Duty Changes – April 2016

Stamp Duty Changes – April 2016

  • From 1 April 2016 existing SDLT residential property rates will be increased by 3% for purchases of additional properties such as buy to let properties and second homes.
  • Broadly, the higher rates will not apply if at the end of the day of the purchase transaction:
    • an individual owns only one residential property, irrespective of the intended use of the property; or,
    • an individual owns two or more residential properties, but they are replacing their main residence (subject to certain conditions).

This change will clearly impact buy to let landlords on top of other recently announced tax changes such as the restriction on interest relief deductions. However, the impact will be wider, potentially affecting anyone buying a second property, even where their other properties are overseas. Further details below.


Background
The increase in SDLT rates by 3% on purchases of additional residential properties was announced in the Autumn Statement. Last week, the Government published a consultation on the changes which explains in detail how the higher rates are intended to apply in various scenarios.

Overview
The higher rates will apply to most purchases of additional residential properties in England, Wales and Northern Ireland where, at the end of the day of the transaction, purchasers own two or more residential properties, and they are not replacing their main residence.

First time buyers purchasing their first property, or home owners moving from one main residence to another, will not be affected.

Points to note

  • SDLT only applies to purchases of land and property in England, Wales and Northern Ireland. Purchases in Scotland are subject to the separate Land and Buildings Transactions Tax (LBTT) regulations (beyond the scope of this note).
  • Property owned globally will be relevant in determining whether a property purchase is an additional property. So for individuals owning property overseas, they may pay the higher SDLT rates even if this is their first property purchase in England, Wales or Northern Ireland.
  • If the purchaser has sold a previous main residence within 18 months before the day of the transaction and the transaction is a purchase of a new main residence, the higher rates will not apply, even where they hold other properties (e.g. buy to let properties).
  • If a new main residence is purchased whilst a previous main residence is still owned, the higher rates of SDLT will apply. However, a refund will be available if the previous main residence is sold within 18 months of the purchase of the new residence.
  • In cases of joint purchasers, the Government is proposing that if any of the purchasers has more than one property and they are not replacing a main residence, the higher rates will apply to the entire consideration for the transaction. However, they have asked for responses as to whether this is a fair approach.
  • The higher rates of SDLT will apply to all purchases of residential property by a company or collective investment vehicle (subject to the availability of an exemption for “large scale investors” explained below).
  • The Government is considering an exemption for “large scale investors”. The exact details of the exemption have not yet been decided. The exemption could be applied either to cases where the purchaser has an existing portfolio of 15 or more properties, or only in cases of bulk purchases of 15 or more properties. The exemption may be restricted to companies and funds but could be widened to include individuals.
  • Purchases by trustees for beneficiaries with life interests or interests in possession will be treated as if the purchase were made by the individual beneficiary themselves. However, purchases by discretionary trusts will always be liable to the higher rates.
  • The higher rates will not apply to purchases below £40,000 or purchases of caravans, mobile homes or houseboats.

Other taxes
The higher rates of SDLT will need to be considered in addition to other tax charges when purchasing residential properties. Other tax charges will vary depending on the circumstances and include capital gains tax, income tax, inheritance tax and the annual tax on enveloped dwellings.

 

Courtesy: PWC

Tax Rules are Set to Tighten

In the 2015 Summer Budget [1], the Chancellor announced new proposals to restrict what landlords can claim against tax. As a result, it’s now even more crucial that landlords ensure they understand the profitability of their buy-to-let portfolio, however small or large it is.

According to the National Landlords Association, 31% of single-property landlords and 17% of those with between 2 and 4 properties either lost money or only managed to break even on their properties between April and June this year [2].

Such financial juggling may have been easier when landlords were able to claim a percentage of the mortgage interest they paid against their marginal tax rate, which could be as high as 45% for some earners.

However, from 2017 landlords may only be able to claim tax relief on their mortgage interest payments at the basic tax rate of 20% [3]. Under current plans, the new rule will be phased in gradually over 4 years.

If you currently claim for interest relief and pay 40% or 45% tax, or expect to do so in the future, you may find that you have to pay more income tax on any buy-to-let income than you do currently. But if you only pay the basic rate of income tax (20%) and this doesn’t change, then you probably won’t see any difference.

Say your buy-to-let property generates a rental income of £10,000 a year, while you pay £9,000 interest on your annual mortgage payments.

Under the current rules, you would receive tax relief on the full amount of interest on your mortgage payments, no matter what level of income tax you pay. You’d only pay income tax on the difference.

So if you’re a basic-rate taxpayer, you would pay 20% income tax on £1,000 (£200). If you pay the higher rate of tax (40%) you’d owe £400, while if you pay the 45% additional income tax rate, it would be £450.

Under the new proposals, the amount that higher and additional-rate taxpayers need to pay in income tax will rise. This is because only 20% of the mortgage interest can be claimed in tax relief, rather than the full amount.

If you pay the higher rate of income tax (40%), you would owe £2,200 in income tax, an additional £1,800 compared to the current rules. Those who pay the additional 45% tax rate would owe £2,700, an extra £2,250.

That’s not all that may be changing. From April 2016 onwards, the Chancellor has proposed that you’ll only be able to claim for ‘wear and tear’ costs on furnished rental properties by providing itemised receipts that show the replacement goods you’ve purchased or repairs you’ve carried out [4]. Currently, you’re given an allowance regardless of your expenditure [5].

Prospective landlords and those with existing properties may want to work out how their plans will be affected by the proposed new rules to avoid a surprise later on. When planning, remember that just as these rules are changing now, they might do so again in the future. The effect of tax rules always depends on individual circumstances and these too can change. Bear in mind that we don’t offer tax advice. If you have further questions, please speak to a financial adviser.

Safety rules are changing

Landlords must already follow certain safety rules. These include obtaining an Energy Performance Certificate for a property before advertising it to tenants [6], as well as an annual Gas Safety Certificate [7] for their property’s boiler and other gas appliances. New measures include rules for preventing legionnaire’s disease [8] and for fitting smoke and carbon monoxide alarms [9].

To encourage landlords to meet their responsibilities, the government is proposing new rules to make it more difficult for them to evict a tenant if the property’s appliances don’t have a current Gas Safety Certificate [10].

Focus on the long term

With changing tax rules and tighter regulations being introduced for buy-to-let landlords, it’s vital to think carefully about the type of investment you want to make. Properties can offer both asset growth through rising house prices and an income from rents – although neither of these can be guaranteed; values can fall and any rent might be exceeded by outgoings.

Another point to consider is your own level of involvement. Managing a property with multiple individual tenants or a large portfolio of separate properties takes time and involves lots of paperwork.

Once you’ve decided on your priorities, you’ll need to think about location. Ben Newman, buy-to-let specialist at property company Savills, says it’s all about the level of risk you’re happy to take on. “For example, if you want a good income then you’ll have to invest in an area where yields [annual gross rent as a percentage of a property’s value] are high,” he says. “To achieve that, you may have to invest in an unfamiliar property market.”

If you’re thinking about investing in buy-to-let, bear in mind that it’s a relatively high-risk and illiquid investment. Also remember that, just as tax rules are changing now, they could change again in future and their effect on you will depend on your circumstances – which can also change.

( courtesy – Barclays )

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