Fenn Wright’s analysis & verdict on summer Budget
1. Homes worth up to £1million will be exempt from Inheritance tax from 2017
2. The amount Buy To Let landlords can claim as relief on mortgage interest payments will
be capped at the basic rate of 20%
3. Homeowners can earn up to £7,500 per annum tax-free by having a lodger
On 8th July, Chancellor George Osborne delivered his summer Budget, the first solely Conservative spending plan for almost 19 years. Mr Osborne echoed the Conservatives election pledges last month to tackle the UK’s housing shortage and aid first time buyers onto the housing market, before announcing three major changes to the residential property market aimed at amending the unpopular inheritance tax threshold and creating a more balanced playing field for homeowners and Buy to Let investors.
1. Inheritance Tax
From 2017 there will be an extra £175,000 per individual allowance on top of the current £325,000, which means that if a couple own a property up to the value of £1million, they will be able to leave it to their children or grandchildren free from this death duty. Downsizers will also be eligible. If somebody downsizes before they die, their tax-free exemption will stay at the value of the house that they sold.
2. Tax break on mortgage interest payments for Buy to Let landlords
The Bank of England believes the current system poses a risk to the country’s balance of homeownership and properties to rent as homeowners are not able to claim tax relief like landlords can. At the moment, Buy to Let investors may buy a property to let it out and then deduct mortgage interest payments from any rental income they receive, depending on their income tax rate. This means that if a landlord is a higher-rate taxpayer they are able to get 40% tax relief on the mortgage interest they are paying. Mr Osborne has now announced that this relief will be restricted to 20%, the basic rate of income, no matter what tax level somebody is on, which will be phased in over a period of four years from 2017.
3. Rent a Room scheme
The amount householders can earn by renting out a furnished room will be increased from £4,250 to £7,500 per annum tax-free.
Alan Williams, Managing Partner at Fenn Wright welcomes the news of the inheritance tax changes (IHT):
“This is excellent news for home owners as 59% of voters believe the tax is unfair (YouGov – March). ‘Ordinary families’ have been paying a death duty that was initially aimed at targeting the wealthy, as house prices continue to appreciate across the home counties. Now, parents can help their children/grandchildren who might be struggling to climb onto the housing ladder or need to upgrade to a bigger property by passing their wealth onto them rather than Treasury coffers. This should give them a better chance to put together the deposit required for a new home.
“Taking into consideration those who want to downsize should mean more larger homes coming to market which are of limited supply at the moment. This is because many of those wishing to downsize are holding on to their homes under the current system. Now they can benefit from the new IHT threshold if they downsize, which is great news for our patch as the larger homes are highly sought after.”
Steve Wright, Partner in Residential Lettings has a mixed reaction to the news of a reduced tax relief:
“Although I understand that the Bank of England want to even out the playing field for homeowners and investors, the reduced tax relief for Buy to let borrowers is disappointing news for the lettings market as it could hit a lot of private investors. The local market is already short of properties and with rents continuing to rise reasonably quickly, investors might be discouraged to enter the market or add to their portfolios. This could lead to a continued shortage of available property to let, causing rental values to rise even further. However, as the reduced tax relief isn’t being implemented until 2017 there should be an orderly market adjustment rather than a significant change immediately so tenants need not worry that their rents are going to skyrocket overnight.
“Should investors step back, this could present an excellent opportunity for both first and second time buyers. At the moment these buyers are having to compete with investors and often lose out on getting their dream home as competitive interest pushes the guide price out of their affordability. With support from Government initiatives which were confirmed in the Conservative’s Housing Manifesto, first and second time buyers could fill this gap.”
“Having spoken to a few of our Buy to Let clients since the summer Budget announcement, they do not seem too deterred due to capital growth prospects so it will be interesting to see what happens in this sector when we reach 2017.”