The first budget of a new government is known for being uncompromising. The first all Conservative Budget for nearly 20 years was no break from this tradition.
The amount of tax relief which is available for interest on mortgages will be restricted to the basic rate of tax, which is currently 20%. The new limitation on landlords will be introduced gradually over four years starting from 6 April 2017.
The measure was intended to address the unfairness of the current system in which homeowners obtain no tax relief on their mortgage payment compared with landlords who obtain tax relief in full.
Also to be removed is the wear and tear allowance. The allowance currently permits landlords of furnished property to deduct the 10% of rents received from taxable profits. From April 2016, only the cost incurred on new furniture will be tax deductible. In the majority of cases the allowance more than covered the cost of furniture and the new measure will have a considerable impact on the tax position of many landlords.
There is possibly a case for moving property into a company where interest would be deducted in full from profits. There are also plans to reduce corporation tax. However, to the extent that profits are extracted as dividend, the new regime for the taxation of dividends may cancel any tax advantage obtained by this form of planning. The capital gains tax and stamp duty implications of transferring a property title into a company should also be considered.
There was better news for live-in-landlords. The rent-a-room relief which has been at £4,250 since 1997 will be increased to £7,500. In effect the first £7,500 a year of income from a lodger will be tax free. It is also possible to switch from deducting a proportion of actual expenses from one year to the next.
Making an investment in property via a person’s home has long been a method for mitigating capital gains tax. However, the budget provided a further incentive for storing value in the family home.
The family home allowance of £175,000 will provide further relief from inheritance tax relief on the transfer of a person’s home to children and grandchildren.
This article supplied by Ray Coman, FCCA, CTA a director of Coman & Co Chartered Accountants.
A more complete examination of the practical implications of the Budget is available here: https://comanandco.co.uk/emergency-budget-2015
— LandlordZONE® (@LandlordZONE) July 10, 2015