Real estate was definitely a hot topic in the Summer Budget, with both expected and unexpected changes. However, what all of the changes have in common are the additional complexities they will bring to homeowners and landlord alike.
It was no surprise when the Chancellor announced an additional inheritance tax allowance to be used against the family home, however, we have also seen some unexpected changes to reliefs available to landlords. So what do we know and what questions remain unanswered?
Inheritance tax main residence nil-rate band
Spouses and civil partners will need to wait until 2020/21 to have the full benefit of a £1m IHT allowance when leaving a property to their direct descendants. The additional allowance will be tapered for those with estates in excess of £2m. Relief will be available against assets of a similar value to a previously owned property where the couple have chosen to downsize.
But what of those with no children/grandchildren to inherit the property and what will ‘downsizing’ mean? Under current proposals, the allowance won’t be available. And will moving from London to a similar size, cheaper property protect the allowance or will this be measured by the property size? We will have to wait to see what HMRC interpret 'downsizing' to mean.
Restricting tax relief for finance costs for landlords
Currently landlords receive full tax relief for their mortgage interest whilst homeowners receive none. This relief is to be tapered out over four tax years to be replaced fully by a basic rate tax deduction in 2020/21.
For those currently receiving 45 per cent tax relief this is surely bad news, however, for those with property losses, if this basic rate tax deduction is allowable against total income (and not just rents), will this bring tax relief forward, even if at a lower rate?
Abolition of the wear and tear allowance
Currently wear and tear allowance (equal to 10 per cent of rents) is available to landlords regardless of what expenses they incur in respect of a rental property. From April 2016 this will be replaced with a new relief allowing residential landlords to deduct the actual costs of replacing furnishings. Landlords will now have to incur expenditure and keep related evidence to obtain relief. Good news for tenants in properties in need of refurbishment, although not if landlords increase their rent to compensate for these lost reliefs!
Increase in rent-a-room relief
Finally good news for those who rent a room in their home – from 2016/17 we will see an increase in the amount that can be received tax free from £4,250 to £7,500.
We await various consultation documents to learn more; however, what is clear is that these new measures either add extra tax burdens or complexities for everyday taxpayers. Is this yet another example of the squeezed middle.
Please contact Joan Foster if you want to discuss how this might impact you.