The first Conservative Budget in 18 years unsurprisingly made much of delivering on manifesto promises. We look at three changes in particular which affect individuals holding UK real estate (whether as an investment asset or as a home).
IHT changes for UK residential property owned by non-doms
From April 2017, all UK residential property held directly or indirectly by foreign domiciled individuals will be within the scope of UK inheritance tax (IHT). So if a residential property is owned by a non-UK incorporated company, the same reliefs and charges should apply as if the residential property were held directly by the owner of the company (e.g. spouse exemption). It is accepted that there will be complications when implementing these changes and the Government intends to consult – although we have not seen any detail on this yet.
If this change is followed through - as we expect it to be - it will significantly reduce the benefits of owning UK residential property via offshore companies (or other opaque entities), whether personally or through a trust. Many non-resident and non-domiciled individuals and trustees will have already considered de-enveloping existing structures when ATED and ATED-related CGT were introduced – and extended - but decided to maintain the structure due to the IHT advantages and confidentiality offered. Those individuals and trustees should now reconsider their position, because the IHT advantages will simply disappear from 2017. Clearly individuals will need to consider the potential costs of de-enveloping following the extension of CGT to non-UK residents. Certainly, for new property purchases, this change looks like the nail in the coffin for corporate ownership of UK residential property by non-doms.
Main Residence Inheritance Tax Nil Rate Band
From 6 April 2017, the estates of individuals who die owning a main residence will benefit from the Main Residence nil rate band (MRNRB). This is set at £100,000 for the 2017/2018 tax year, rising each tax year and reaching £175,000 in the 2020/2021 tax year, thereafter rising in line with the Consumer Prices Index. MRNRB will be available when an individual passes their main residence to their descendants on death. If passed to a surviving spouse or civil partner, the MRNRB can be transferred for use on the later death of the surviving spouse or civil partner.
Where individuals have disposed of the main home or downsized since 8 July 2015, the band is still available to reduce IHT payable on other assets. The benefit of the MRNRB will be restricted for estates with a net value of more than £2m.
The MRNRB was one of the Conservative Government's "rabbits out of the hat" in the Summer Budget, although it does seem to be a rather complicated way of achieving a long-held Conservative objective of ensuring that married couples or civil partners could pass on assets up to £1m to their families on death without any IHT charge. This will involve a degree of additional record-keeping by individuals and their executors.
Income Tax Changes for residential lettings (buy to let)
Currently, interest on a loan taken out by an individual to acquire a let property will usually be deductible in full when calculating the individual's income tax liability. Tax relief will now be restricted to the basic rate (currently 20%) in all cases. The restriction will be in full force from the 2020/21 tax year, but will be phased in with effect from the 2017/18 tax year.
It has been further proposed that from April 2016 the so-called "Wear and Tear Allowance" for furnished residential lets will be replaced by a new relief which will be based on actual expenditure and will certainly be more complex. The consultation document was issued on on 17 July 2015, entitled "Replacing Wear and Tear Allowance with Tax Relief for Replacing Furnishings in Let Residential Dwelling-Houses", and comments are invited by 9 October 2015. Whilst a balanced proposal, clearly landlords will need to keep accurate records of their expenditure on replacement furnishings going forward.
Please contact Jonathan Legg if you have any further queries or would like advice on these issues.