Impact of Budget 2012 on Landlords

Wednesday, June 20, 2012

Specialist property accountant Stephen Fay ACA provides an overview of the changes in the recent Budget that affect landlords and property investors. Stephen is part of Fylde Accountants who have recently joined the NLA's Recognised Supplier Scheme.

Landlords are affected by a myriad of taxes - meaning that each Budget brings new challenges - some of which are specific to landlords, and some are general changes that affect everyone.

The following highlights the key points:

Income tax

The key tax affecting landlords as it is usually payable every year.

Good news:

The Personal Allowance on which no tax is charged is to increase to £8105 (2012-13) and then to £9205 (2013-14) - note: this also applies to non-resident landlords. For landlords with total income under the Basic Rate limit of £42,475, this means a real future income tax reduction. The Chancellor mentioned £10,000 as the target Personal Allowance for the medium term.

The 50% tax rate is reduced to 45% as of 2013 - affecting some lucky landlords! For those with companies, ensure that bonuses & dividends above this level are paid out after April 2013 if possible.

Bad news:

The Higher Rate tax threshold reduces from £35,000 to £34,370 - so Higher Rate taxpayers will not benefit from the Personal Allowance increase. Higher Personal Allowance for those aged >65 are to be phased out to align (eventually) with the 'regular' Personal Allowance - AKA the so-called 'granny tax'. This is part of the euphemistically called 'tax simplification' process!

Tax Reliefs - New Rules

Income tax 'reliefs' are to be restricted to the greater of £50,000 or 25% of income as of April 2013. This has been a concern for some landlords as it is currently unclear exactly which reliefs this relates to - for example, does this include sideways loss relief claims for capital allowances? It certainly affects Gift Aid payments, but it's unlikely to affect finance interest relief, or property rental losses. Those with capital allowances to claim (you do know if you're entitled to claim capital allowances on your property - don't you?), and loss-making property traders, should ensure their accountant keeps them updated.

Capital Gains Tax

No change to the Personal Allowance of £10,600, or to the rate of either 18% or 28%. However, property disposals by non-resident & 'non-natural' (companies mostly) entities will be subject to CGT from April 2013 - anyone with an offshore property investment company should see their accountant! Capital Allowances (CAs)

CAs are the tax equivalent of depreciation. The 'first year' CA (called the 'Annual Investment Allowance') reduced in April 2012 from £100k to £25k per annum, with remaining allowances only dripping through in future years at 18% per year, rather than the previous 20%. This means tax relief is delayed, though still received eventually. Also, new legislation will ensure that CAs are not claimed more than once during the life of a property. Property buyer and seller will need to agree a value for CAs within 2 years of the transaction, and the seller will need to have accounted for these pre-sale. Missing out on valuable CAs can be a painful experience - so make sure your solicitor is on the ball when completing the conveyancing!

Stamp duty land tax (SDLT)

There is a new rate of 7% now payable on residential properties worth >£2m - I wonder what the yields are like on £2m properties?!

There is also a better definition of 'residential' and a new 15% SDLT rate for properties worth >£2m acquired by 'non-natural persons' (mostly companies) - both UK and foreign. Also, so-called SDLT 'sub-sale relief' - using an option to buy a property - has been abolished. This was a 'loophole' that HMRC 'considered' illegal (i.e. only their opinion) - the new legislation literally makes these schemes illegal now.