There hasn’t been a dull moment over the last 12 months as far as property and the Government’s Budgets are concerned. But it does take time for some changes to come into effect after they’ve been announced and it’s easy for things to get forgotten. So, although there were no major new announcements or amendments in the March Budget, here’s a reminder of the new laws coming in this year that could affect you.
Do be aware that changes announced in the Budget can apply to England only, both England and Wales, and sometimes Northern Ireland, but Scotland generally has its own Budget, especially when it comes to residential property.
Reminder of previous Budget changes coming into effect in 2016
When a change is announced in a Budget, it could come into effect right away, like the new stamp duty system did back in December 2014. But a lot of the time the Government goes through a consultation phase before it confirms exactly what the final change will be and when it’ll come into force. Sometimes that consultation process results in the proposed change getting scrapped altogether.
Here are some changes from last year’s Budgets that are coming in this year and could affect you:
Additional 3% stamp duty
From 1st April 2016, if you complete on the purchase of a property that is not your main home and have two properties on the day of completion, you’ll almost certainly have to pay a higher rate of stamp duty. This is 3% higher than the stamp duty you’d pay if you were buying a property to live in yourself. If you’re buying the property for less than £40,000 you don’t have to pay any stamp duty at all, but if it’s worth more, the stamp duty applies to the whole amount.
Example 1: 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’ because you already own a residential or other property, which Buy to Let investments typically are, you’ll have to pay 3% stamp duty on the £100,000, which is £3,000.
Example 2: 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:
3% x £125,000 = £3,750
5% x £75,000 = £3,750
Total stamp duty bill = £7,500
In contrast if it was your own home, you’d pay nothing on the first £125,000 and just 2% on the £75,000, which is £1,500. So as the Buy to Let landlord in this example, you’re paying £6,000 extra.
Who has to pay the higher-rate stamp duty?
The rules around what is officially classed as a second home are complicated. If you already have a home you live in at the point you complete on a Buy to Let purchase, you’ll almost certainly have to pay the extra 3% - assuming the property you’re buying is worth over £40,000. Take a look at our properties for less than £40,000 at the bottom of this article.
A more complicated situation is if you have a Buy to Let property already but have sold your home and are currently renting while you buy a new permanent home. In this case, you may or may not have to pay the higher rate depending on whether the new residential property is deemed as a second home or not. Your legal company will need to clarify this for you.
And if you’re married, bear in mind that you’re considered ‘one entity’. So if you split up or need to have two separate homes for an extended family, for example, then you’ll have to prove this to avoid paying the additional 3% on the second property.
So, because it’s not as straightforward as you might have thought, do check what level of stamp duty you’ll need to pay before you put in an offer on a property, ideally with a legal company. This stamp duty document has all the latest rules and regulations and there are some useful ‘questions and answers’ starting from page 24, which should help you understand your own circumstances a bit better.
‘Standard’ wear and tear allowance disappearing
In the past, you could claim a 10% allowance for ‘wear and tear’ on a property and its contents, even if you hadn’t actually spent any money on repairs or replacements, but this is changing. From April 6th this year, you’ll only be able to claim what you have paid out. (From April 1st for corporation tax payers.)
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 main difference is that you’ll 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 this April, your personal allowance – that’s the amount of money you can earn without paying any tax – goes up from £10,600 to £11,000.
And, if you get any income from a company or from money you’ve invested in stocks and shares, you can earn up to £5,000 tax free, per year, per person.
So what’s in the latest Budget?
The main property changes were on the commercial side, with stamp duty changing from midnight on March 16/17th to:
0% rate on purchases up to £150,000,
2% on next £100,000
5% top rate above £250,000.
Insurance premiums to rise
There’s going to be a small increase in insurance premiums of 0.5%, taking them 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 might help boost the income you earn from property or other investments.
From April 2016 the personal earnings allowance goes up to £11,000 and then it increases again next year, to £11,500. The higher-rate tax threshold has also risen, so from April 2017, you can earn up to £45,000 before the 40% tax starts to apply.
If you’ve got other investment assets, apart from property, there’s some good news for you. From April 6th 2016, Capital Gains Tax is being cut from 28% to 20% for higher-rate tax payers and from 18% to 10% for lower-rate tax payers.
Unfortunately, this doesn’t apply to any property gains when you come to sell, however any capital gains you make on your own residential property is tax exempt.
Over 18 and under 40?
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 by 25%, up to a maximum of £3,000. That means if you’d managed to save £12,000, the Government would have topped it up to £15,000.
The Chancellor has now proposed an even bigger scheme, called a ‘Lifetime ISA’. Anyone over the age of 18 and under 40 can save up to £4,000 a year and be given a Government top-up of 25% (£1,000). There are conditions, though: the money must either be used as a deposit for a first home, or it has to be left in the ISA until the person is 60, when it can be taken out tax free.
For more about this scheme, read the new government Lifetime ISA information.
A problem or an opportunity?
There was an unusual announcement, which it may be helpful for you to know about. The Government seems keen to encourage people to take advantage of the small earnings opportunities that have come about thanks to the internet and its ‘sharing economy’.
So if you live near a station or football stadium, for example, they’re suggesting you let space on your driveway. If you own your home and have a spare room, they’re encouraging you to offer it to someone to stay in for a night or two. If you do that kind of thing, you can now earn up to £1,000 a year, tax free - and you don’t even need to declare the income (according to current recommendations).
The thing to be aware of is that it could cause a problem for you, as a landlord. What if your tenant decides to let your drive or sub-let rooms in your property? 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’re happy for them to 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 about property tax and the way this year’s changes could affect you, pop into your local Your Move branch.
And if you need any financial help from a mortgage perspective – especially now that the Government is scrapping their free ‘Money Advice Service’ site - do come and speak to one of our specialists.
This three bedroomed mid terrace property would make a great project property for an investor. Comprising of an open plan lounge/ dining room, kitchen, lobby/porch, shower room and three bedrooms.
Offers over £33,000
This spacious top floor flat is located within the popular town of Grangemouth and offers bright and welcoming accommodation comprising of a communal entrance, entrance hall, lounge, kitchen, two double bedrooms and a bathroom.
This first floor flat offers a central location and well presented living accommodation. The flat comprises of an entrance hall, lounge, kitchen, bathroom and bedroom with a garden to the front of the property.