26 November 2015
The headline grabber in the Chancellor’s Autumn Statement was of course the slashing of the £4.4 billion tax credits cuts. Abandoning cuts to the police budget in England and Wales also featured highly. However, there were also some tax changes that while unlikely to affect the majority of people will be of some significance to those they do.
Capital Gains Tax
The CGT payment window will be greatly reduced for residential properties. This will not of course affect main residences, on which no CGT is usually due, through the availability of Principal Private Residence relief. However it will affect second homes and buy to let properties. Currently, taxpayers have up to 21 months to pay CGT, depending on what time of year they sell a property. Under the new rules, the tax will have to be paid within 30 days after settlement. This change is expected to be put in place by 2019.
CGT is not always triggered by a sale as a disposal includes property gifted or changing hands under a separation agreement so funds are not always readily available. This change to the CGT payment window will make it even more important to take tax advice before even contemplating disposing of residential property which will trigger a CGT charge.
Stamp Duty Land Tax
These changes are not applicable to properties in Scotland as these are now subject to Land and Buildings Transaction Tax which is set by the Scottish Government, but this could still affect Scottish taxpayers buying properties in England and Wales.
From 1 April 2016, second homes and buy to let properties over the value of £40,000 will be subject to a higher rate of SDLT. They will pay a 3% surcharge on the rate that normally applies. This will significantly increase the tax due, especially at the lower end of the property market. A property costing £100,000 would currently pay no SDLT as the minimum threshold is set at £125,000 for residential properties. This new change would see a purchaser of a buy to let property or second home at this value now pay £3,000 in SDLT.
Once again, following the changes announced in the March Budget 2015, buy to let landlords are being targeted through the changes to CGT and SDLT. The earlier changes included the abolition of the wear and tear allowance from April 2016 and the restriction of interest relief on mortgages to basic rate tax only, which will be phased in from April 2017.
Wear and tear allowance allows a taxpayer to deduct 10% of their gross rent as an allowance towards furniture and furnishings in a furnished property. From April 2016, landlords will only be able to deduct the actual cost of replacing furniture. Restricting interest relief means that while basic rate taxpayers will be able to claim all the interest they have paid as a deduction against their gross rent, higher rate taxpayers will only be able to claim part of the interest.
Contrary to some pre statement discussion, Inheritance Tax did not feature greatly in the Chancellor’s statement. He did however confirm that following a review of Deeds of Variation promised in his Budget in March 2015, he had decided not to introduce new restrictions on how Deeds of Variation can be used for tax purposes. He also confirmed that their use would be monitored.
This will be a massive relief for many tax practitioners for whom Deeds of Variation provide a legitimate means of altering entitlements within an estate within two years of a person’s death. Some may say announcing a ‘review’ of Deeds of Variation in the March 2015 Budget was a cynical dig at Ed Milliband who had recently used such a tax saving measure in his father’s estate.
The Chancellor also confirmed that legislation would be brought in to ensure a charge to inheritance tax will not arise when a pension scheme member designates funds for drawdown but does not draw all of the funds before death. This will be backdated to apply to deaths on or after 6 April 2011.
ISA allowances were frozen at £15,240 however a concession that was announced is that the ISA savings of a deceased person will continue to benefit from their tax free status during the administration of the estate. Currently they are removed from their tax free wrapper on the date of death.
This follows on from the announcement in last year’s Autumn Statement that when an ISA saver dies their spouse or civil partner can inherit their tax advantages. This is achieved by giving their spouse or civil partner a one off ISA allowance equivalent to the value of the deceased’s ISA savings.
Pensioners will once again be pleased to see that their state pensions will rise from April 2016 in what is the highest real terms increase to the state pension for 15 years. The state pension will rise to £119.30 a week, a rise of £3.35.
Those receiving the state pension who are likely to pay Inheritance Tax on their death should take this opportunity to review their income and expenditure to see if they can make use of the ‘regular gifts out of surplus income’ exemption from Inheritance Tax.
For more information about the Autumn Statement and how it affects you or for any personal tax advice please contact a member of the BTO Private Client team:-
Roddy Harrison firstname.lastname@example.org
Neil Headrick email@example.com
Ross Brown firstname.lastname@example.org
Emma Donaldson email@example.com
T: 0141 221 8012