The Summer Budget has brought a number of measures, which will impact on the real estate sector.
Buy to let
Individuals who let residential property will only get basic rate relief on their finance costs. To ease the burden, the impact will be tapered from April 2017 so that the measure is fully implemented by April 2020.
Although income tax is only chargeable on profits, this measure may have a significant impact on cash flows, causing potential difficulties for landlords in meeting loan repayment deadlines. With this in mind, we could start to see higher rate tax paying landlords undertaking their rental business through companies.
The cutting of welfare benefits will have an impact on certain rental businesses.
Currently furnished rental businesses benefit from a 10 per cent wear and tear allowance. From April 2016, the government will replace this allowance with a new system that enables all landlords of residential property to only deduct costs they actually incur.
A new IHT relief is to be introduced for homes. It will start at £100,000 in April 2017 and rise to £175,000 by April 2020. Couples will be able to transfer their unused allowance. There is provision for the relief to be still available on downsizing.
Rent –a-room relief will increase from £4,250 to £7,500 from April 2016. In the last few years many homeowners have started to pay tax on renting out a room. This should reverse the trend and will simplify their tax affairs.
From April 2017, the government will extend inheritance tax to residential properties held indirectly, such as companies.
The long overdue reform of business rates still continues. However, the government will publish a business tax road map by April 2016, setting out plans for business taxes over the rest of the Parliament. Whilst also running a wide-ranging review of business rates.
Annual investment allowance (AIA)
Businesses will continue to benefit from 100 per cent capital allowances on qualifying investments in plant and machinery on £200,000 of capital expenditure. This is clearly good news for commercial property businesses, allowing them to obtain relief for significant refurbishment work.
Taxation companies and dividends
From April 2017 corporation tax rates will fall to 19 per cent, with anticipation of a further fall to 18 per cent from April 2020.
From April 2016, UK resident individuals will pay an extra 7.5 per cent on dividends received from companies. This will mean it will become more expensive to extract profits from companies. We might start to see sophisticated individuals replacing pensions with property companies which build up wealth that is then distributed when the taxpayer is not exposed to higher rates.
Private equity structures
Managers of private equity property funds have, for a number of years, been able to receive tax free carried interest. However, the government is now set to introduce measures to ensure their reward is subject to capital gains tax at a rate of 28 per cent.