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Wills, Probate, Tax & Trusts

Property & Taxes in 2017: What you need to know

February 28, 2017

Last year saw major changes to the way residential property is taxed. A number of these changes were designed to apply to the purchase of second homes and buy-to-let properties. In practise, it’s not just second home owners and buy-to-let landlords who are affected.

Our Wills & Tax Planning solicitor, Bart Obszynski, explains the property tax changes & outlines further changes to come.

Harbourside

Stamp Duty Land Tax (SDLT): The 3% charge

Purchasers of second homes and buy-to-let properties have been subject to an additional 3% charge since 1 April 2016 (unless contracts exchanged before 25 Nov 2015).

Post 1 April 2016, the SDLT owed when investing in a buy to let property worth £250,000 quadrupled from £2,500 to £10,000.

Who else is affected?

SDLT is charged on the transaction rather than on individual purchasers so a couple buying their first home together may be subject to the additional 3% charge if just one of them has a property they aren’t selling (but reliefs are available and you should check with your advisor).

Where a person does not complete their sale and purchase on the same day, the purchase of the new property will also be subject to the additional 3%.

There is scope to reclaim if the ‘first’ property is sold within 36 months of the purchase of the ‘second’ property but purchasers in this situation still need to make provision to fund the SDLT charge. They may also incur legal costs in reclaiming the additional 3% tax paid.

How can I avoid the 3% charge?

We warn against complex arrangements to avoid SDLT. Such schemes will be challenged and have been retrospectively shut down by the government.

Anyone hoping to reduce their SDLT bill should seek professional advice before undertaking planning.

Income tax changes

From 6 April 2016, anyone renting a room in their main residence, under the rent a room scheme, no longer pays income tax on rental income if it does not exceed £7,500 a year.

The bad news is that finance charges may no longer be set off in full against rental income from 6 April 2017. The changes are being phased in over three tax years and the new regime won’t fully come into force until 6 April 2020.

Say John has a salary of £35,000 and a rental income of £18,000. His finance costs come to £10,000 per year.

The table illustrates how John’s income tax will increase.

When                                       Income tax

Prior to 6th April 2017                  £6,400

From 6th April 2017                     £6,900

From 6th April 2018                     £7,400

From 6th April 2019                     £7,900

From 6th April 2020                     £8,400

John could reduce his income tax bill by setting off “allowable deductions” against rental profits and

should keep detailed records of all expenditure in case HMRC ask to see receipts.

Capital Gains Tax (CGT)

Non-UK residents (including UK citizens abroad) will now be subject to Capital Gains Tax when they sell UK residential property.

Clients who have previously lived in a property which is now a buy-to-let should seek professional advice about their CGT liability as the scope for reducing the tax paid can be considerable.

Inheritance Tax (IHT): Main residence nil rate band

The government has introduced new rules to fulfil its manifesto commitment to let couples leave up to £1 million free of IHT to their children. In short, second homes can benefit from the new rules but buy-to-let properties will not. Large estates will also not benefit.

In reality, the new rules are so fiendishly complicated that the subject merits an article of its own - watch this space!

Burroughs Day are here to help and advise you on all aspects of your Wills & Tax Planning requirements and offer all clients Free First Advice. If you would like more information please contact Bart 0117 930 7548 or email bart.obszynski@burroughsday.com

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Property & Taxes in 2017: What you need to know

Bart Obszynski

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