The following are the main tax changes affecting property investors announced in last week’s Budget and the recent Autumn Statement:
Three major taxes apply to UK residential property valued at over £2 million which is owned by ‘non-natural persons’ (typically companies):
- 15% stamp duty land tax
- The annual tax on enveloped dwellings
- Capital gains tax at 28% on gains arising after 5 April 2013. This is higher than the corporation tax that would be payable by a UK company and brings foreign companies into the UK tax net.
Each of these taxes is to be extended to residential dwellings worth in excess of just £500,000 held by non-natural persons.
Properties are exempt from these charges where acquired for use in a business, including a property rental business. The ATED exemption will, however, need to be claimed on an annual basis.
The new stamp duty land tax threshold applies from 20 March 2014. For property in Scotland, it will be short-lived, as stamp duty land tax is to be replaced by a Land and Buildings Transaction Tax from 1 April 2015. However, the Scottish Government is considering applying this tax to purchases of shares in companies which own residential property.
The annual tax on enveloped dwellings will apply to property worth over £1 million but no more than £2 million from 1 April 2015 and will initially be charged at £7,000 on these properties. It will apply to property worth over £500,000, but no more than £1 million, from 1 April 2016 and will initially be charged at £3,500 on these properties.
The 28% capital gains tax charge will apply to gains on properties worth over £1 million, but no more than £2 million, accruing after 5 April 2015 and to gains on properties worth over £500,000, but no more than £1 million, accruing after 5 April 2016.
CGT on Residential Property
Two key changes announced in the 2013 Autumn Statement are worth repeating here:
- The final period of ownership exemption for principal private residences is to be reduced from three years to eighteen months for sales taking place after 5th April 2014
- Non-resident individuals will be subject to CGT on the gains arising on UK residential property after 5th April 2015
Basic Rate Band
If you are a basic-rate taxpayer you pay 18% CGT on some or all of your taxable capital gains. In the forthcoming 2014/15 tax year you can have up to £31,865 of capital gains taxed at 18% instead of 28%.
The basic rate band has been continually cut in recent years to pay for increases in the income tax personal allowance. Taking inflation into account you would expect it to have been around £44,000 by now.
Business Premises Renovation Allowances
Changes applying to expenditure incurred from April 2014 onwards include:
- New rules to tighten up the definition of qualifying expenditure
- The allowance will not be available where the project also attracts any other form of State Aid
- Works must be carried out within 36 months of the date of a payment for which tax relief is claimed
- The period during which balancing adjustments may be charged reduces from seven years to five years
New Pension Rules
Not strictly a property tax but worth mentioning.
The new pension rule that will allow everyone to withdraw all their savings as a lump sum may result in some extortionate tax bills. For example, someone with a £300,000 pension pot who withdraws all their savings as a lump sum in April next year will face a tax bill of £87,393.
Some of the lump sum will, of course, be tax free but the rest will be taxed at a combination of 20%, 40% and 45% (with no personal allowance allowed). The effective tax rate on the £225,000 taxable portion is an astonishing 39%. Furthermore, if the lump sum is invested the returns will no longer be tax free.
No doubt the deficit cutters in the Government are looking forward to receiving these tax windfalls. However, purely from a tax saving perspective, the vast majority of individuals will continue to be better off spreading their pension withdrawals over many years. This will allow them to benefit from multiple income tax personal allowances and have most of their pension income taxed at no more than 20%.
Nick Braun is the founder of Taxcafe which publishes tax guides for property investors and business owners – www.taxcafe.co.uk