Budget round-up for 2016
There hasn’t been a dull moment over the last 12 months as far as property and the Government’s Budgets are concerned, however, it does take time for some of the changes to come into effect. So, although there were no major new announcements or amendments in the March Budget, it’s useful to be reminded of the legislation that could affect you this year.
Do be aware that Budget changes can apply to England only or to England and Wales - and sometimes Northern Ireland - but Scotland will typically have its own Budget, especially when it comes to residential property.
Changes from previous Budgets coming into effect in 2016
When a change is announced in a Budget, sometimes it comes into effect that night – as happened with the stamp duty changes back in December 2014 – but in many cases the Government goes through a consultation phase before confirming exactly how the change will be implemented, or even scrapping the changes altogether.
Several changes from last year’s Budgets are coming in over the next few months:
Additional 3% stamp duty from 1 April 2016
Most second-home purchases that complete after this date will attract a higher rate of stamp duty, which is 3% higher than the stamp duty you would pay on your primary residence. Transactions under £40,000 are exempt, although if the property is worth more than this, you do pay the higher rate on the whole value: £40,000 is an exemption threshold, not a duty-free allowance. Take a look at our properties for less than £40,000 at the bottom of this article.
So if you buy a property in England for £100,000 and use it as your own home, you won’t pay any stamp duty at all. If it’s classed as a ‘second home’, over and above your main residence as Buy to Let investments often are, you will have to pay 3% stamp duty on the £100,000, which is £3,000.
If you buy a second property for £200,000, you’ll pay 3% on the amount up to £125,000, then 5% on the amount from £125,000 to £200,000, rather than simply 2% on that amount:
3% x £125,000 = £3,750
5% x £75,000 = £3,750
Total stamp duty bill = £7,500 (£6,000 higher than the £1,500 you would pay if buying your own home.)
Who will pay the extra stamp duty amount?
The rules around what is classed as a second home are complicated. If you already have a home you live in and on the day you complete on your Buy to Let purchase you have two properties, it is likely you will have to pay the extra 3%, if the property is over £40,000.
However, if you have sold your residential home and currently own a Buy to Let but are renting a property intending to buy a new residential home, you may not end up paying the higher rate.
And if you’re married you are considered ‘one entity’, so if you split up or have to have two homes for different families for any reason, as long as you can show you are separated/divorced then you may not have to pay the additional 3%.
This means moving forward, it is wise to instruct a legal company prior to buying another home so you know what level of stamp duty you will need to pay before you confirm an offer on a property.
Wear and tear allowance from April 1 2016 for corporation tax payers and from April 6 for income tax payers
In the past, you could claim a 10% allowance for ‘wear and tear’ on a property and its contents, regardless of whether you had actually spent any money. From April this will change and you will only be able to claim what you have paid out.
If you buy new furniture, furnishings or appliances, you can deduct the cost of the new items ‘where the expenditure is on a replacement item provided for use in the dwelling’.
The key difference is you will need to keep a record of the actual expenditure and make sure you ‘exclude any elements of improvement’.
It’s not all bad news, though. From April your personal allowance – i.e. the amount of money you can earn without paying any tax - increases from £10,600 to £11,000.
And, if you secure money from a company or stocks and shares, you can earn up to £5,000 tax free, per year, per person.
What is in the latest Budget?
The main property changes were on the commercial side, with stamp duty changing from midnight on March 16/17 to:
O% rate on purchases up to £150,000,
2% on next £100,000
5% top rate above £250,000.
Insurance premiums to rise
Other changes included a small increase in insurance premiums of 0.5%, taking the premium from 9.5% to 10%. Although this will cost everyone a little bit more, the money is supposed to be earmarked for additional spending on flood defences, particularly in areas such as Leeds, York, Calder Valley and Cumbria. So if you or your properties have been affected by flooding, this extra money could help prevent these kind of disasters in the future.
Possible reductions in taxation
Apart from these changes, there doesn’t seem to be much else that directly affects property investment, however, there are some changes that may help boost the income you earn from property or other investments.
This includes things like the personal allowance rising to £11,000 from April 2016 and again next year, to £11,500, plus a rise in the threshold where you have to pay higher tax rates. From April 2017, you can earn up to £45,000 before the 40% tax starts to apply.
If you invest in assets other than property, there is also some good news from April 6th 2016. This is a substantial cut in Capital Gains Tax from 28% to 20% for higher-rate tax payers and from 18% to 10% for lower-rate tax payers.
Unfortunately, this reduction will not apply to any gains you make when selling property, although any gains you make on your residential property are free from tax.
Are you over 18 and under 40 years old?
On December 1st 2015, the Government launched a new type of ISA called a ‘Help to Buy’ ISA. This was a saving scheme to encourage first-time buyers to save for a deposit by offering to top up savings of up to £12,000 by 25% (£3,000 maximum). You could save up to £200 a month and secure a £50 top up from the Government.
The Chancellor has now proposed the introduction of an even bigger scheme, called a ‘Lifetime ISA’, which will allow anyone over the age of 18 and under 40 to save up to £4,000 a year and be given a Government top-up of 25% (£1,000), provided the money either goes towards buying a first home or is left in the ISA to be taken out tax free at the age of 60.
For more about this scheme, read the new Government Lifetime ISA information.
A problem or an opportunity?
One unusual announcement, which it may be helpful for you to know about, is the way the Government is encouraging people to take advantage of the small earnings opportunities that the internet has provided, via the ‘sharing economy’.
So if you live near a station or football stadium and can let your own driveway, or own your home and are happy to have someone stay over for a night or two, you can now earn up to £1,000 a year from these opportunities. Not only do you pay no tax, you also don’t need to declare the income (according to current recommendations).
However, as a landlord this could pose a problem for you. What if your tenant decides to let your drive or sub-let rooms in their home? That could contravene your agreement with your lender or put your tenant and property at risk if they don’t take the right precautions.
If you manage your property yourself, it’s probably worth discussing this with your tenants so they understand what you are happy and able to let them do.
Please also note that some announcements in Budgets can be withdrawn at a later date or changed based on the consultation process, but we will also do our best to try to keep you up to date with latest thinking and changes.
If you have any questions regarding property tax and the way this year’s changes will affect you, or need any financial help from a mortgage perspective – particularly since the Government also announced that they are scrapping the free ‘Money Advice Service’ site they currently back - do feel free to contact your local Reeds Rains office.