Property owners counting the cost of recent tax changes
THE recent Budget underlined the fact that our economy is in a mess. Tax rises and spending cuts only add to the general gloom.
The picture in the residential buy-to-let market seems to be one of depressed values (possibly, slowly recovering) but, by and large, healthy occupancy and rent levels. Those lucky enough to be enjoying low interest rates may feel better off – provided the extra cash is dealt with wisely.
The Budget tax changes will affect residential property owners more than earlier ones have. The new rules for capital gains tax (CGT) are aimed at non-business ( ie, non-trading) assets and mean that care must be taken over disposals of property, especially if proceeds will be swallowed up in loan repayments, with little left to pay the taxman.
When the freeze in inheritance tax (IHT) limits is considered as well, the question of what to do with property portfolios has become a thorny issue.
The biggest change is to the CGT régime, although it was not as bad as some feared. The higher (28 per cent) rate will affect residential property owners. The key for this tax year will be careful allocation of the annual exempt amount (AEA) and efficient utilisation of the basic rate band. Transferring property to a spouse will help to maximise this.
The AEA was thought to be under attack but perhaps will survive, so the scope for the usual CGT mitigation techniques should remain. There may be more pain to come, in the form of even higher rates; we’ll know at the next Budget.
For non-higher-rate taxpayers, the (income) personal allowance is set to rise spectacularly, but for high earners, specific planning is required (including pension provision). Again, equalising income between spouses is a sensible strategy but take care when it comes to property income – and take advice.
Trusts often feature in tax planning but this is harder nowadays with the severe tax treatment that they receive, as a result of recent reforms. Often used for family (non-tax) reasons, they are still a useful tool. However, inherent high income and CGT rates mean that sometimes it might be better to break a trust ahead of the sale of its property assets.
Capital allowances are not available for expenditure on residential property (except, eg, common areas for blocks of flats) but it is possible to claim for equipment in a commercial office (which coordinates the let properties). This has not changed, nor has the wear and tear allowance (alternative renewals basis), so don’t forget to make a claim. If it is possible to claim expenditure as repairs, this will maximise relief.
Inheritance tax is a big issue for property owners. The nil-rate band is to be frozen for the foreseeable future but there are still some good planning ideas. These need to be implemented carefully but, if done well, can save thousands in tax.
There is some good news: stamp duty land tax (SDLT) is not charged on properties up to £250,000 bought by first-time buyers before March 26, 2012. However, if any property has been owned previously, anywhere in the world, this relief will not apply. In contrast, all residential property bought after April 5, 2011 for more than £1m will suffer SDLT at 5 per cent.
Finally, furnished holiday lettings will continue to enjoy their special “trading” treatment.
The extension to the European Economic Area continues, too. There is to be a consultation on this, which may lead to restrictions. For example, it is thought that the number of qualifying days may be increased. At present, the requirement is for the property to be available for 20 weeks and actually let for 10. Any increase to this could cause problems ( eg, at some unfashionable seaside resorts).
The conclusion is that, while the Budget will inevitably lead to higher tax costs (not forgetting the impact of the new 20 per cent standard rate of VAT on non-deductible costs), things are not as bad as they might have been. There is still scope for tax planning and, in the problem areas such as CGT and IHT, currently there are some interesting and effective ideas.
Duncan Meredith is a tax consultant at Garbutt & Elliott Leeds (0113 273 9600) and York (01904 464100). email firstname.lastname@example.org or visit www.garbutt-elliott.co.uk
TAX IMPACT: But rent levels and occupancy remain healthy.