After last July’s Bombshell Budget that crucified landlords and company owners and the Autumn Statement that whacked up buy-to-let stamp duty by thousands of pounds, today’s Budget contained quite a lot of good news.

The main tax changes are as follows:

Income tax thresholds

From April this year the income tax personal allowance will be increased to £11,000 and the higher-rate threshold to £43,000.

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In today’s Budget it was announced that for the 2017/18 tax year the personal allowance will be increased to £11,500 and the higher-rate threshold to £45,000.

Taxpayers in Scotland should note that, from 2017/18 onwards, the Scottish Parliament will set its own income tax rates and thresholds, although these will not apply to savings income and dividend income.

National Insurance

The Government will abolish Class 2 national insurance (currently around £146 per year) from April 2018.

Corporation tax rate

Companies currently pay 20% corporation tax. Cuts were announced in the July 2015 Budget and in today’s Budget it was announced that the rate will be cut further to 17% from April 2020. Thus corporation tax will be levied as follows:

  • From 1 April 2017 – 19%
  • From 1 April 2020 – 17%

Capital gains tax rates

At present the capital gains tax rates are 28% (higher-rate taxpayers) and 18% (where there is unused basic-rate band).

From 6 April 2016 the rates will be reduced to 20% and 10% respectively.

Sadly, the new rates will not apply to sales of residential property.

In other words, the main beneficiaries will be owners of commercial property and share investors (although most stock market investors can shelter their gains from tax by investing via an ISA).

Where you sell residential property and other assets in the same tax year, you will be able to use any unused basic-rate band in the most beneficial way (presumably to ensure your property gains are taxed at 18% and your other assets at 20%).

Stamp duty land tax – Non-residential properties

From 17 March SDLT for non-residential property will no longer be calculated using the single rate or “slab” approach. Instead it will be calculated in a similar way to residential property. The new rates are as follows:

Transaction Value  Rate
£0 – £150,000 0%
£150,001 – £250,000 2%
£250,000 + 5%

 
If you pay £300,000 for a non-residential property, you will now pay nothing on the first £150,000, 2% on the next £100,000 and 5% on the final £50,000 – £4,500 in total. Under the old system you would have paid 3% on the whole amount – £9,000.

According to the Government, all non-residential freehold and lease premium transactions worth less than £1.05 million will pay the same SDLT or less compared to the current system.

Stamp duty land tax – Additional Properties

From 1 April 2016 higher rates of stamp duty land tax apply to purchases of “additional” residential properties (typically rental properties and second homes).

The higher rates are 3% above the standard rates:

£0 to £125,000 – 3%*

£125,000 to £250,000 – 5%

£250,000 to £925,000 – 8%

£925,000 to £1.5m – 13%

Over £1.5m – 15%

*Only applies if total price is over £40,000. For purchases at £40,000 or less no stamp duty land tax is payable.

For example, if you buy a second home for £300,000, you will pay 3% on the first £125,000, 5% on the next £125,000 and 8% on the final £50,000 – £14,000 in total. That’s £9,000 more than someone who pays SDLT at the normal rates!

Initially, the Government proposed an exemption for corporates and funds making significant investments in residential property. They have now decided that the higher rates will apply to everyone – there will be no exemption.

The higher rates do not apply if you are simply replacing your main residence. If you buy a new main residence before selling your old one you will have to pay the higher rates of stamp duty land tax. Thankfully, as long as you sell your old home within 36 months, the additional SDLT can be refunded (initially the time limit was going to be 18 months).

The new rules may still prove cruel to landlords and second home owners who sell their main residence and move into rented accommodation before buying a new main residence.

For example, if you sell your main residence and move to a new area you may wish to rent for a period while you familiarize yourself with the local property market. However, if you own any other residential property and wait more than 36 months to replace your main residence you will have to pay the higher rates of stamp duty land tax and the extra tax will not be refundable.

Business rates

From April 2017, small businesses that occupy property with a rateable value of £12,000 or less will pay no business rates.

Currently, this 100% relief is available if you’re a business that occupies a property (e.g. a shop or office) with a value of £6,000 or less.

Businesses with a property with a rateable value between £12,000 and £15,000 will receive tapered relief.

Property and trading income allowances

From April 2017, a new £1,000 allowance for property income and a £1,000 allowance for trading income will be introduced. Individuals with property income or trading income below £1,000 will no longer need to declare or pay tax on that income.

ISAs

From April next year the ISA limit will be increased from just over £15,000 to £20,000.

Lifetime ISA

From April 2017 those between 18 and 40 will be able to open a Lifetime ISA. Any savings you put in (up to £4,000 per year) will receive a 25% Government bonus (so if you put in £4,000 the Government will add £1,000).

The money can be used towards a deposit on a first home worth up to £450,000 or to save for retirement. If you use it to save for retirement you can withdraw all the money tax-free after your 60th birthday. You will also be able to withdraw the money at any time before you turn 60, but will lose the Government bonus (and any interest or growth on this) and will also have to pay a 5% charge.

These new accounts could be an attractive alternative to saving in a pension for basic-rate taxpayers because like pensions they will attract a top up from the Government but, unlike pensions, all the money taken out will be tax free. And in an emergency you’ll be able to get your hands on your savings.

Pensions

The Government had planned to either take away higher-rate tax relief on pension contributions or introduce something called a pension ISA, both of which would have left many taxpayers worse off.

Fortunately, they’ve backed off… for now.

And don’t forget other recent changes…

From 6 April the rates on dividend income will increase by 7.5%, although the first £5,000 of dividend income will be tax free. This change will mainly affect company owners who take most of their income as dividends rather than salary.

This means company owners have just a few weeks to pay themselves dividends taxed at the current lower rates.

From April 2016 the Government will replace the wear and tear allowance with a new relief that allows residential landlords to deduct the actual costs of replacing furnishings.

The forthcoming 2016/17 tax year is also the last one in which residential landlords will be able to claim full tax relief on their mortgage interest. In 2017/18 only 75% of mortgage interest will be tax deductible and by the time we get to 2020/21 none of it will be tax deductible. In its place landlords will be given a “tax reduction” equivalent to 20% of their interest.

Many landlords, in particular those with high levels of borrowing, have not fully digested the implications of this tax change. When none of your interest is tax deductible your taxable rental profits could soar which means you could end up being forced to pay tax at 40% (and possibly 45%) on profits you haven’t actually made and may face other tax penalties including the loss of your income tax personal allowance and child benefit.

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Nick Braun BCom, MSc, PhD is the founder of Taxcafe which publishes a range of tax guides for business owners and landlords including How to Save Property Tax and Landlord Inheritance Tax

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