Key private client tax changes in the March 2016 Budget
John Bunker and Anthony Nixon take a closer look at major changes to SDLT, lifetime ISA allowances, and CGT rates
With the Budget came draft legislation and HMRC guidance notes on the rules whereby many purchasers of residential property will have to pay an extra 3 per cent stamp duty land tax (SDLT) from 1 April 2016.
Higher SDLT charge
The basic provision is that if a purchaser (or any one of them) owns another residential property at midnight on completion day and the purchase is NOT a replacement of the purchaser’s main home, an extra 3 per cent SDLT is payable.
This will be a significant cost for many, for example £15,000 more on a £500,000 house. While the main target is buy-to-let properties, these will not be the only ones caught.
A purchaser’s first home will be caught if the proprietor(s) already owns an interest in another residential property. Despite protestations to the consultation, while existing homeowners (who also own a buy-to-let) are protected from the extra 3 per cent when replacing their home, this has not been extended to first-time buyers.
Ownership means beneficial ownership, including a bare trust or an interest in possession trust owning residential property. This cuts both ways: interests in these trusts can escape the extra 3 per cent if the property is the beneficiary’s main home, but such interests will count as ownership of another property, so may mean the beneficiary has to pay the extra 3 per cent. There is real scope for restructuring trusts to change interests held.
It makes no difference that the share of ownership of another property is a small fractional interest, unless that interest is itself worth less than £40,000.
Ownership of inherited residential property may have to be counted, but improvements have been made here. Ownership only begins when a property interest is assigned out of the estate concerned. Usually, ?only a sole transferee’s interest is counted from the date of assignment.
Where two or more beneficiaries inherit (unless together with a spouse they have over 50 per cent), they will have three years from the assignment before this interest is ‘ownership’ for these new rules. All purchases by trustees will pay the 3 per cent extra, except when the purchase is made by a bare trustee or interest in possession trustee for a beneficiary’s main home and that beneficiary has no other residential property interest, or the purchase replaces that beneficiary’s previous main home.
An individual is treated as replacing their main home where there’s a simultaneous sale and purchase. Previously, it was proposed there would also be a ‘replacement’ if the old home was sold within 18 months before, or 18 months after, the new purchase. The legislation extends this to three years both before and after purchasing the new home, but the individual must have no other main home within that extended period.
Those who cannot sell their old home before purchasing its replacement still suffer a cash-flow disadvantage. The extra 3 per cent has to be paid on purchase and is only reclaimed when the old home is sold. There is a new ‘objective’ test of what is a main home and no equivalent to the ability homeowners have under capital gains tax (CGT) rules to choose which of two or more residences are treated as their main residence.
Details of how HMRC proposes to apply the main home test and other useful details including 34(!) questions and answers, are set out in HMRC’s guidance notes at https://bit.ly/HMRCSDLT.
The surprise 8 per cent reduction in CGT rates, from 28 per cent and 18 per cent to 20 per cent and 10 per cent, from 2016/17, does not extend to residential properties. Continuing the attack on rented property, with an extra 8 per cent CGT charge on any residential property gain not benefiting from private residential relief (PPR) relief. Claiming PPR, effectively using elections where there is more than one residence, becomes increasingly significant.
Residence nil-rate band (RNRB) for inheritance tax (IHT)
Downsizing provisions in the Finance Bill 2016 will complete the introduction of this crucial new IHT relief for homes. New planning is needed around the potential loss of RNRB for estates exceeding £2 m.
New taxation of pension death benefits, fully effective from 6 April 2016 (with new tax treatment of lump sums distributed from pension schemes), opens up real estate planning opportunities. Clients should now review pension scheme arrangements.
The Lifetime ISA, incentivising saving among under 40s from 2017/18, adds a bonus £1 for every £4 saved, up to the maximum of £4k per annum. Help-to-buy ISAs can be converted. While less restricted, its prime use is for buying a first home or to help with retirement (withdrawing after 60, otherwise withdrawals are penalised).
Annual total ISA limits increase to £20k from 2017/18. The facility to pass on ISAs to a spouse on death will be enhanced by extending tax relief – income tax and CGT – to the administration period post-death. With the pension lifetime allowance reducing to £1m, ISAs become increasingly significant for long-term saving and tax planning.