**On the 25 April 2017 the UK Chancellor announced the removal of some significant clauses within Finance Bill (No2) 2017 which affects the content of this article. Any references to changes to be introduced April 2017 should be considered on-hold until further notice. This article will be updated once the final position is known**
Nobody knows the prospects for UK residential property in 2016 and beyond, but as the graph shows below, prices have been subject to considerable fluctuations in the last 10 years.
New for 2015 – Capital Gains Tax (CGT)
Following consultation in 2014 on capital gains tax for non-residents, the law changed from 6 April 2015 to bring gains on UK residential properties owned by non-residents under the CGT net.
Only the proportion of the overall gain that relates to the period after 5 April 2015 is chargeable. This can be calculated in one of two ways, at the choice of the taxpayer.
‘Re-basing’ means that the gain is calculated by subtracting the rebased open market value as at 5 April 2015 from the sale price.
‘Apportionment’ allows the full gain from purchase to sale to be reduced by the period of ownership before the rule change as a proportion of the full time of ownership.
If there is a loss upon disposal, the full reduction in value can be used or carried forward as a loss, without the need for apportionment, against future chargeable UK property gains.
As it is the taxpayer’s responsibility to accurately value the property, it remains in their interest to consider acquiring one or more professional valuations before it is too late.
Private Residence Relief remains available to the extent that the property is the owner’s only or main residence. However, from 6 April 2015 this can only be claimed where a new occupancy test is met, and is on a year-by-year basis. The test is met if the taxpayer or spouse/civil partner stays in the property for at least 90 nights during the tax year in question.
Several other Private Residence Relief ‘subsidiary reliefs’ remain. Where the property in question was once the taxpayer’s main residence, ‘final year relief’ allows a further proportionate reduction in the gain. This is currently set at 18 months (36 months prior to 5 April 2013).
Where the same property was let out, ‘lettings relief’ reducing the remaining gain further is available up to a maximum of £40,000.
Finally, there may be qualifying periods of absence (‘absence relief’) where the owner was overseas in work related accommodation at the requirement of their employer, and owned no other properties.
2016 and beyond
Several other highly significant changes have been announced in the summer budget 2015.
The wear and tear allowance, which allows anyone letting out furnished property to claim 10% of the rent as an allowance, regardless of any actual annual expenditure, will be removed at the end of the 2015/16 tax year. It will be replaced with a new relief, based on the actual costs incurred in the replacement of furniture and furnishings.
Mortgage interest tax relief will also change. This tax was withdrawn from homeowners 15 years ago, although landlords still receive the relief. Currently, landlords can claim tax relief on monthly interest repayments at the top level of tax they pay, up to 45 percent. In a move which will begin to level the playing field for homebuyers and buy-to-let investors however, the relief that landlords can claim will be set at the basic rate of income tax. This change will be phased in over a four-year period from April 2017.
Furthermore, it has been announced that non-domiciles, who ‘envelope’ UK property in offshore companies to avoid inheritance tax (IHT), will no longer be able to plan this way, with consultation as to the detail in Q4 2015.
Further political risk
At the same time as their review of CGT in 2014, the Government consulted on removing the personal allowance for income tax enjoyed by non-residents on UK source income. For many property owners, this helps relieve tax on rental income. The consultation concluded that removing the allowance for all, other than those with a strong economic connection with the UK, was highly desirable. They decided, however, that because of the complexity associated with such a change, further consultation was necessary, and that any new law would not take effect before 5 April 2017.
In the run up to the 2015 General Election, a ‘mansion tax’ was mooted by a number of political commentators, and supported by the Labour party. Though the idea of a ‘mansion tax’ seems to have subsided, a number of Conservative MPs have called for a review of council tax.
This was introduced as the primary source of collecting income from residents by local authorities in April 1993. The levy was calculated by allocating every dwelling to one of eight tax bands. This allocation was made on the basis of a property’s assumed capital value as of April 1991, with the same amount levied on all homes valued at over £320,000. Given the disproportionate growth of properties, particulary in London and the South East, it is interesting to consider how long this inequality will continue.
Property related investment risk
Investing directly in residential property may feel to clients like a low risk option, especially as they get a physical asset to show for their money. If property prices decline however, and they don’t hold an uncorrelated asset, they could potentially lose a considerable amount of money. Property is generally illiquid, so selling quickly normally means accepting a lower price.
It’s worth remembering that although the UK has seen good property growth since 2009, the average UK property price dropped by close to 25% in 2008 and 2009. And recently, Mark Carney, the Governor of the Bank of England, reflected upon a housing ‘bubble’ in London and the South East.
Furthermore, with interest rates being at a historical low, any increase may substantially weaken demand, with distressed sales having the ability to negatively disturb the market.