How the Budget 2016 affects property investors

With the Stamp Duty surcharge coming into effect today, we look back at the key points from the Budget 2016 affecting the UK property market.

  • The planned stamp duty surcharge on purchases of additional property, to include those who buy more than 15 properties. Previously if you owned more than 15 properties you were exempt from the surcharge.
  • An 3% surcharge will be applied to residential stamp duty rates on all purchases of property not intended as the buyer’s main residence, from today, 1st April 2016.
    stampduty
  • The threshold at which people pay 40% tax will rise from £42,385 to £45,000 in April 2017 and personal allowance up to £11,500.
  • 0.5% rise in insurance premium tax.
  • Commercial stamp duty
    0% rate on purchases up to £150,000,
    2% on next £100,000 and
    5% top rate above £250,000.
    New 2% rate for high-value leases with net present value above £5m

Other issues to consider from previous budgets

  • Withdrawal of interest relief

Under current rules, taxable profits are reduced by interest on money borrowed for the purposes of the letting business.  Phased in over a four year period starting with the 2017/18 tax year, UK taxpayers will no longer be able to deduct interest in calculating taxable rental profits.  Instead, landlords will obtain a reduction in tax equal to basic rate tax on any interest borrowed.

The changes will be introduced gradually, so that the amount of interest which is deducted from rental profits is 75% from 6 April 2017, 50% from 6 April 2018, 25% from 6 April 2019 and 100% from 2020/21.

On the same dates, a reduction in tax will be given for the interest which has been disallowed.  The tax reducer is the basic rate tax (currently 20%) multiplied by the disallowed interest.  In practice the tax reducer will be 20% of 25% of interest for 2017/18, 20% of 50% of interest for 2018/19, 20% of 75% of interest for 2019/20 and 20% of the whole interest from 2020/21.

By 2020/21, a landlord who is a higher rate taxpayer will effectively only receive basic rate tax relief on mortgage interest payments.

Conclusion

Overall the positives for the Budget 2016 are a few; higher income tax thresholds and allowances and lower corporation tax.

The negatives are greater with the surcharges on Stamp Duty, higher insurance, and removal of interest relief.

The impact of new investors is much higher with the increases upfront Stamp Duty expense, and for those who are heavily mortgaged on their buy to let investments.

However it will take some time to effect rents and house prices, these may balance some of the additional costs for buy to let and property investors.

With interest rates still so low, property investment still out weighs leaving your money in the bank.

 

Sources:

LRS Forum

Coman & Co

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