Digest of the recent Budget announcements…

We wanted to share our thoughts on the Budget with you from a property perspective.

  • Probably the most important point was that the Chancellor used his Budget speech to announce that mortgage interest relief for buy-to-let properties will be restricted to the 20% basic rate of income tax, to be phased in over the next 4 years from April 2017. As a result that same day we saw shares in Britain’s biggest house builders fell by between 5-6%; an obvious knock on effect. Experts warned that rents will rise, we doubt this will be a consequence and in fairness it was probably an unfair tax break over first time buyers who receive no such tax break. Perhaps it is not surprising given that buy to let represents 15% of all mortgages taken out this year, but interestingly 2 in every 3 properties entering the buy to let market since 2007 have done so without any mortgage so no affect there. We would not expect any further punitive measures against the buy to let sector, given its important status in providing homes to the growing private rental sector market. Obviously, this does not affect those that hold properties in a limited company structure; and this is worthy of consideration for those looking to build up a significant rental portfolio over time.
  • Abolition of the wear and tear allowance; Currently wear and tear allowance (equal to 10% of rents) is available to landlords regardless of what expenses they incur in respect of a rental property. From April 2016 this will be replaced with a new relief allowing residential landlords to deduct the actual costs of replacing furnishings. Landlords will now have to keep related evidence of expenditure to obtain relief.
  • There was good news for homeowners letting a room to lodgers; the tax-free Rent-A-Room limit has been upped from £4,250 to £7,500 from April 2016. There are an estimated 19 million empty bedrooms in owner-occupied properties in England alone. Freeing up just 5% of those rooms would accommodate almost a million people – the equivalent of a city the size of Birmingham. Interestingly, it had been at the £4250 level for 18 years, so it was time this threshold was increased.

Other potentially relevant information;

  • An increase in the inheritance tax threshold to £1m for married couples by 2017.
  • Making council and housing association tenants in England who earn more than £30,000 – or £40,000 in London – pay up to the market rent.
  • Confirming the introduction of a Help To Buy ISA and extending Right To Buy for housing associations, plus new planning reforms to be announced on Friday.
  • Non-doms with residential property will pay same tax as UK owners and permanent non-dom tax status will be abolished (coming into effect in April 2017).
  • the surprise and welcome announcement that Corporation Tax will be reduced to 19% and then 18% – the lowest rate in Europe apparently, which should attract a vast amount of investment from international businesses. This change will lead to an inflow of money that will likely dwarf any potential outflow caused by the changes to the non-dom legislation and mortgage tax relief.

Our thoughts are whilst the announcement on mortgage interest relief is a negative, the market will adjust to it. Residential Property as an asset class still offers extremely favourable characteristics; an investment that people understand, a real tangible product, a rental income stream and exposure to a market that is clearly undersupplied. Oakham, Rutland, Stamford, Kettering, Northampton and the wider area still offers appealing opportunities for buy to let, potentially this news may put off some investors, offering more opportunities to those seeking long term returns.

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