Budget Update for Property Investors

The Chancellor announced a number of new measures in his second Budget for 2015, many of which affect property investors resident in the UK or living overseas.

Restriction of relief for mortgage interest and finance costs

The changes announced will affect Individuals that receive rental income on residential property in the UK, or elsewhere, and incur finance costs such as mortgage interest. The exception being where the property meets all the criteria to be a furnished holiday letting.

This measure will restrict relief for finance costs on residential properties to the basic rate of income tax and will be introduced gradually from 6 April 2017. Landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits, but will instead receive a basic rate reduction from their income tax liability.

The changes will be phased in as follows:

• 2016-17 finance costs will be deducted from rental profits as currently allowed.
• 2017-18 75% of finance costs will be deducted from property income, with 25% being available as a basic rate tax reduction.
• 2018-19 50% finance costs deduction and 50% given as a basic rate tax reduction.
• 2019-29 25% finance costs deduction and 75% given as a basic rate tax reduction.
• 2020-21 all finance costs incurred by a landlord will be given as a basic rate tax reduction.

Individuals will be able to claim a basic rate tax reduction from their income tax liability on the portion of finance costs not deducted in calculating the rental profit, and excess finance costs may be carried forward to following years, if the tax relief has been limited to 20% of the profits of the rental business in the year.

Reform of the Wear and Tear Allowance

From April 2016, the government will replace the Wear and Tear Allowance with a new relief that allows all residential landlords to deduct the actual costs of replacing furnishings. Capital allowances will continue to apply for landlords of furnished holiday lets.

Increase to Rent-a-Room Relief

Having been fixed at £4,250 for some time, the government will increase the level of Rent-a-Room relief to £7,500 from April 2016.

Inheritance tax and the main residence nil-rate band

The government will introduce an additional nil-rate band when a residence is passed on death to a direct descendant. This will be £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20, and £175,000 in 2020-21. It will then increase in line with Consumer Prices Index (CPI) from 2021-22 onwards.

Any unused nil-rate band will be transferred to a surviving spouse or civil partner. It will also be available when a person downsizes or ceases to own a home on or after 8 July 2015, and assets of an equivalent value up to the value of the additional nil-rate band, are passed on death to direct descendants.

There will however be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.