The Chancellor, George Osborne, delivered the first Conservative budget in 18 years on 8 July. Whilst figures from the Office for Budget Responsibility provided a positive backdrop, the Chancellor warned that the UK is not immune to economic risk, with uncertainty over the Greek debt crisis and slowdowns in the US and Chinese markets weighing on the global economy. Against this economic background, the Chancellor pledged to deliver a “budget that puts security first”.
The Government is seeking to ‘level the playing field’ between buy-to-let owners and those who buy a new home in which to live. Currently ‘buy-to-let’ landlords can claim tax relief against rental income on monthly interest repayments at upto the top level of tax of 45 per cent, which is estimated to cost the Treasury £6.3billion a year.
Therefore, starting from April 2017 and phased in over a four-year period, mortgage interest relief on residential property will gradually be restricted to the basic rate of Income Tax, currently 20%.
Commentators suggest this buy-to-let measure is likely to have a greater effect on the property sector than the change in non-domiciled status; it has been suggested that restricting mortgage relief, together with caps on housing benefits and the possibility of a rise in interest rates in the medium term, may squeeze some investors in lower-value buy-to-let markets and could slow down growth in such areas; others suggest that, if today’s low yields remain at similar levels by the time the restriction comes into force, this change could result in upward pressure on rents.
However, people who rent out a room in their home will be able to earn £7,000 tax free.
Wear and Tear Allowance
The government will replace the existing wear and tear allowance with a new relief that will allow all residential landlords to deduct the actual cost of replacing furnishings from April 2016. Capital allowances will continue to apply to landlords of furnished holiday lets.
CGT for Non-Doms Disposing of UK Residential Property
Capital Gains Tax (CGT) will be charged on gains accruing on the disposal of UK residential property by non-UK residents.
Currently, the scope of CGT in the UK is limited to those persons resident in the UK. This scope will be extended from 6 April 2015 to include non-UK resident individuals, trusts, personal representatives and narrowly controlled companies disposing of UK residential property.
Non-UK residents will be subject to the same rates of tax as UK taxpayers (18/28% for individuals/ 20% for corporates) but only gains accruing from 6 April 2015 will be subject to tax. The non-UK resident is able to ‘rebase’ the property to 6 April 2015 market value or, if more beneficial, can either time-apportion the gain or have the entire gain/loss taken into account.
From April 2017, people who are born in the UK to parents who are domiciled here will no longer be able to claim ‘non-dom’ status and those who own a home in the UK and would normally pay IHT on it will no longer be able to avoid it by holding the property in an offshore structure.
Most significantly, from April 2017, the Government will abolish permanent non-dom status so that people who have been UK residents for more than 15 of the past 20 years will pay full taxes on all their worldwide income and gains; the Chancellor expects these changes to raise £1.5 billion in tax revenue.
Inheritance Tax (IHT) Threshold rises to £1M
George Osborne lightened the burden of Inheritance Tax (IHT) saying that “the wish to pass something on to your children is about the most basic, natural and human aspiration there is”.
Starting from April 2017, a new £175,000 family-home allowance will be phased in on top of the current IHT threshold (£325,000). This will bring the total IHT-free allowance to £500,000 per person by 2020–21 which couples and partners can then combine to £1 Million. Those who decide to downsize will not lose any of the allowance.
Spouses and civil partners will be able to transfer both allowances to each other. As a result, they will be able to leave estates worth up to £1 million to their children or grandchildren completely free of IHT; however, IHT will continue to be levied at 40% on assets in excess of the threshold and the tax allowance will be tapered away for estates worth more than £2 million.
At present, IHT is charged at 40% above a threshold of £325,000 for an individual and £650,000 for married couples and civil partners.
Social Housing – Rents
Rents in the social housing sector will be reduced by 1% a year for the next four years however, housing association tenants in England who earn more than £30,000 per household – or £40,000 in London – will have to pay up to market rent.
Social Housing – Right to Buy
The Right to Buy scheme, which already applies to most council tenants, will be extended to 1.3 million housing association tenants, who will get a discount of up to 70% to buy their own home.
Responding to concerns that this will reduce the housing stock, Mr Cameron and Mr Osborne say that: “by helping people to own their own home, through Right to Buy, we can turn tenants into home-owners and reduce housing benefit bills”.
Starter Homes at a Discount
The Government also wants to build 200,000 “starter homes”, to be sold at below market rate for first-time buyers under 40.
They will urge local councils to give land with planning permission to those who want to build or commission their own homes, to double the number of custom-built houses in the UK.
A “programme of regeneration” around the country’s railway stations will form part of the drive to release public sector brown-field land for 150,000 homes.
Help to Buy
The Prime Minister and Chancellor have also confirmed they will keep the Help to Buy scheme, which offers home-buyers either loans or mortgage guarantees, until 2020.