July budget changes
Compared to the Stamp Duty overhaul last time round, the July budget was less dramatic for the housing market but still had a couple of notable changes.
A new “family home allowance” is being introduced, to remove inheritance tax from families whose wealth primarily consists of the home. This adds £175,000 per person to the existing £325,000 IHT allowance.
Like the standard allowance this is transferrable across married couples and civil partnerships to give a total theoretical allowance per couple of £1m.
The “family home” element is important though: since it’s ringfenced, estates with a home valued less than £350,00 (£175,000 per person) cannot transfer that allowance to other assets. That said, it seems unlikely that many £1m+ estates will have a home under the £350,000 limit.
There’s one exception to this: where homeowners downsize to a smaller property they will be able to retain the allowance from their previous residence – effectively the cash they realise from that sale is still protected from inheritance tax.
That’s a welcome move in that it won’t make older homeowners feel they have to stay in larger properties than they need (taking them out of the market for younger families) but still some critics argue that by creating a tax incentive for property over other assets, this may drive up house prices further.
Buy to Let Interest Relief
On the flip side to the inheritance tax cut, landlords face a tax increase.
Currently landlords can offset the cost of their BTL mortgage interest against income tax: so a mortgage costing, say, £5,000 per year in interest allows for an extra £5,000 of income to be earned tax-free.
Under new rules that tax relief will be limited to the basic rate of income tax, currently 20%. So landlords paying higher (40%) and additional (45%) rates will end up paying income tax at 20% and 25% respectively on that money, where previously they paid nothing. Basic rate taxpayers will be unaffected.
There’s no need to panic yet though. The change is to be phased in over 4 years, and doesn’t start until 2017. While the precise structure hasn’t been announced yet, clearly the impact is designed to be gradual and give landlords plenty of time to review their options. And after all, there is still that 20% tax relief not available on other investments.
However limiting the tax relief adds strength to the argument that landlords need to keep on top of their funding, and make sure they’re not paying more interest than they need to.