Lindsey Wicks takes a look at tax changes in the property tax arena that come into force from April 2017.
There are numerous property tax changes that take effect from April 2017, primarily in the income tax and inheritance tax codes. Some were enacted back in 2015, while others were confirmed as recently as 31 January 2017.
The cash basis and unincorporated property businesses
Under the umbrella of the ‘making tax digital’ project, it was confirmed on 31 January 2017 that the cash basis will become the ‘default’ method of taxation for eligible unincorporated property businesses from April 2017. Points to note include:
- the initial entry limit will be annual receipts not in excess of £150,000;
- property businesses can elect to opt out and choose to apply the accruals basis instead;
- the decision about whether to apply the cash basis or accruals basis can be made separately for each separate property businesses (but not for each property);
- landlords who also have trading income can make independent decisions about whether to apply the cash basis to their property and trading businesses;
- joint owners of property (who are not in partnership, or spouses or civil partners) can decide individually whether to apply the cash basis or the accruals basis;
- income will be treated as received when it is paid to the letting agent (rather than the landlord);
- refundable security deposits will only be recognised as income when it is established that the money is legally the landlords to retain;
- like the accruals basis, the initial cost of qualifying capital items will not be a deductible expense under the cash basis, and landlords can only claim replacement of domestic items relief on the cost of replacements;
- similar restrictions on financing costs will apply to those using the cash basis and the accruals basis; and
- the cash basis cannot be used by companies, limited liability partnerships, partnerships with members other than individuals, trustees of trusts, and personal representatives.
- For more information, see ‘Cash Basis For Landlords: A Brave New World!’ in this edition of Property Tax Insider.
- A new allowance for the ‘sharing economy’
- With the growth of the sharing economy and people increasingly sharing their talents and assets on a small scale to generate income, a new £1,000 income tax allowance for property income will be available from April 2017. It will remove the need to declare and pay tax on property income from small scale lettings falling wholly within the allowance. An example might be the letting of a car parking space.
Those with property income over the £1,000 allowance can choose to deduct the allowance rather than their actual expenses from their property income.
This allowance is separate to rent-a-room relief, which continues to be available for letting furnished accommodation in your home, although a consultation on rent a room relief is expected in the summer.
Restricting relief for finance costs
For landlords of residential properties, the income tax finance cost restriction (introduced by F(No.2)A 2015) will start taking effect from April 2017. The restriction does not apply to the letting of commercial property, furnished holiday lettings, or for companies.
The measure is being phased in over four years, so that eventually, relief for finance costs will be at the basic rate of income tax (currently 20%). In 2017/18, 75% of the finance costs will be relieved in full, and 25% at the basic rate.
Finance costs include mortgage interest and other interest on other loan finance, such as on furnishings. It also includes arrangement and repayment fees. There continues to be no relief for repayments of loan capital.
There are further restrictions where profits from property letting are less than finance costs, or where some of the property income falls within the personal income tax allowance. In this case, excess finance costs may be carried forward.
As well as impacting the commercial returns from property letting, the restriction may push taxpayers into higher rates of income tax, and the higher income child benefit charge.
Inheritance tax relief for the home
Many have been calling for a private residence exemption for inheritance tax (IHT) for a long time. We are not quite there yet, but the new IHT residence nil rate band will apply for deaths on or after 6 April 2017 where a home is left to direct descendants. The initial level will be £100,000 in 2017/18, but the extra nil rate band will be tapered for estates worth more than £2 million.
Like the IHT nil rate band, claims for unused amounts of the residence nil rate band can be made by the spouse or civil partner. This also applies where the first death was before 6 April 2017 i.e. before the residence nil rate band existed.
The residence nil rate band is also accompanied by a relief (known as the ‘downsizing addition’) for those who choose to downsize or sell their home on or after 8 July 2015 and leave assets of the same value to direct descendants.
However, note that unlike the IHT nil rate band, the residence nil rate band does not apply to lifetime gifts.
Excluded property
Alongside the introduction of a new deemed domicile rule, the definition of excluded property will be changed. This measure is designed to bring UK residential property held through offshore structures within the scope of UK IHT from 6 April 2017.
It will apply where:
- the beneficial owner of the property is an individual domiciled outside theUK;
- the property is held in a settlement where the settlor was domiciled outside the UK when the settlement was made; and
- the property falls within one of the following three categories:
- any right or interest in a close company attributable to a UK residential property interest;
- an interest in a partnership, if and to the extent that the value of the interest is directly or indirectly attributable to a UK residential property interest; and
- rights of a creditor and money or money's worth, which is used or made available as collateral or security for relevant loans.
Lifetime ISA – saving for the first home
A new lifetime individual savings account (ISA), available to those aged between 18 and 40, is introduced from April 2017. Up to £4,000 can be saved each year with a 25% bonus from the government for savings made up to the investor’s 50th birthday. The bonus is payable on the contributions made rather than the value of the investment (i.e. the bonus is not paid on any interest).
The money can be withdrawn to buy the first home (where the home is worth up to £450,000) or saved until the age of 60. If it is withdrawn before the age of 60 for a reason other than buying the first home, a 25% charge will apply to recover the bonus and associated interest, together with a small charge.
Contributions to a lifetime ISA will count towards the overall individual ISA limit for the year (£20,000 in 2017/18). However, transfers from other ISA products from savings made in previous tax years will only count towards the lifetime ISA limit for the tax year in which the transfer is made, and not the overall ISA limit for that tax year.
The ‘help to buy ISA’ will continue to be open for new savers until 30 November 2019, and savers will be able to claim a government bonus until 1 December 2030. However, if a saver has both a help to buy ISA and a lifetime ISA, they will only be able to use the government bonus from one of the savings products to buy their first home.
Goodbye to the business premises renovation allowance
As highlighted in my November 2016 article in Property Tax Insider, the business premises renovation allowance will expire in April 2017.
Practical Tip:
Transfers can be made from funds saved into a help to buy ISA before 6 April 2017 (including any interest) to a lifetime ISA during the 2017/18 tax year only, without counting towards the lifetime ISA limit for that tax year. The full transfer value will qualify for the 25% government bonus.
