Prop­erty own­ers count­ing the cost of re­cent tax changes

Yorkshire Post - Property - - PROPERTY - Dun­can Mered­ith

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 dmered­ith@gar­but­tel­liott.co.uk or visit www.gar­butt-el­liott.co.uk

TAX IM­PACT: But rent lev­els and oc­cu­pancy re­main healthy.

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