Jul 9, 2015

Big budget for a country with big ambitions

In his first Budget in a Conservative government, Chancellor George Osborne has made some bold moves, earning him as many fans as detractors.


The Budget, dubbed as being one for working people, delivered: an increase in inheritance tax allowance to account for rise in property value; an increase in the personal tax allowance to £11,000, with the higher rate tax threshold being raised to £43,000. The Budget laid out plans to reduce corporation tax to 19 per cent next year and 18 per cent in 2020 encouraging more companies to do business in the UK boosting employment prospects for the British workforce.

There is good news on the inheritance tax front, with an additional £175,000 on top of the current personal allowance of £325,000 being introduced from 2017. This means married couples and civil partners can pass on assets worth up to £1m without paying inheritance tax.

Osborne noted that the British economy has grown by three per cent but that global risks are also rising. With the ‘Greek crisis’ hanging over the proceedings, the Budget also delivered some uncomfortable plans. There was a blow to buy-to-let landlords with the reduction in the tax relief that can be claimed on monthly interest repayments. From 2017, the current rate of 45 per cent tax relief will be reduced to 20 per cent tax relief.

In addition, from April next year, the 10 per cent ‘wear and tear’ tax allowance’ will be superseded by a system that only allows tax relief on furnishings that are replaced.

Tax relief for homeowners was stopped in 2000 but has continued for landlords. And while buy-to-let landlords have been at an advantage because they can offset mortgage payments against income, they have plenty of hidden costs too. Costs such as agents’ fees, insurance, maintenance and repair, council tax and ground rent. For many, tax relief at the higher rate has accounted for most of their profit margin.

So what prompted this move? The Bank of England noted that buy-to-let lending accounted for 15 per cent of mortgages this year alone. Their worry is that the growth of buy-to-let properties has pushed residential buyers out of the marketplace, inflating prices and reducing the number of available properties. Osborne’s move hopes to redress the balance, creating a level playing field for homeowners and investors and that the phased introduction from 2017 will give the market time to adjust.

The industry has expressed concern that it could result in investors selling from their property portfolio reducing the range of places available for tenants. For the significant number of people who enjoy the freedom of renting, or for whom, regular relocation is an aspect of their employment, having a good, affordable selection of properties is essential.

In addition, many have invested in property to supplement their retirement funds, especially in the light of April’s pensions freedom initiative and the poor performance of savings and ISA interest rates. The move could find landlords paying more in tax than they yield in profit and looking to increase rents to cover the shortfall.

Savvy investors however, do have time to plan their approach, whether that’s assessing their current portfolio or capping what they are prepared to pay for any new properties. By discussing the options with financial advisors and reputable agents, landlords will likely discover ways to keep their investments, their profits healthy and tenants happy.

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