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Budget 2016: Key Points for Property Sector
- AuthorJoanne Sworder
As always there were some winners and some losers following the Chancellor’s latest Budget announcement and this contrast was particularly marked in the property sector. Mr Osborne gave owners of commercial property a boost, but there was not so much good news for buy-to-let investors. But it’s not just landlords who will suffer; people looking to buy or sell a residential property also need to beware.
Capital Gains Tax
For disposals made on or after 6th April 2016, the higher rate of Capital Gains Tax (CGT) will be cut from 28% to 20% and the basic rate from 18% to 10%.
However, there will be an 8% surcharge to be paid on chargeable gains on residential property.
Capital Gains Tax on residential property does not apply to your main home, only to additional properties.
The surcharge is designed to act as an incentive to invest in companies over property. Private Residence Relief will continue to ensure that an individual’s main home is not subject to CGT.
New Stamp Duty Rates for Commercial Property
Along with the introduction of changes to residential stamp duty, a reform of commercial rates of stamp duty were announced in the Budget. With effect from 17th March 2016, the rates will apply to the value of the property over each tax band, bringing the calculation in line with the banding charges for residential property and moving away from the old ‘slab’ system.
The new rates and tax bands will be 0% for the portion of the transaction value up to £150,000; 2% between £150,001 and £250,000, and 5% above £250,000.
This means that all freehold and lease premium transactions below £1.05 million will pay the same or less in stamp duty.
Stamp duty rates for leasehold rent transactions will also change, with a new 2% stamp duty rate on leases with a net present value over £5 million.
For those transactions which have already exchanged contracts but not completed when the changes come into force, transitional rules will apply.
Stamp Duty Changes to Residential Property
The proposed changes announced during the Spending Review and Autumn Statement 2015 have been confirmed. Purchases of additional residential properties from 1st April 2016 will attract a surcharge of 3% on current residential property rates. This also means that, while purchasers of properties for their own residence do not start to pay stamp duty until £125,000, additional property purchasers will pay stamp duty on the first £125,000 at 3%.
However, any property purchase under £40,000 will not attract stamp duty, in a strange twist meaning the old ‘slab’ system of calculating the tax that we recently moved away from has now, if only in a minor way, been reintroduced. For example, a buy-to-let purchaser of a property for £39,000 won’t pay any tax. A buy-to-let purchaser of a property for £40,001 will pay £1,200.
Using examples nearer to the average property price, the tax difference becomes even greater. For a property priced at £200,000, a main residence purchaser would pay £1,500, while a purchase as a second home would attract a tax of £7,500.
Although there was a consultation after the Spending Review announcements, little amendment has been made to the detail, other than the withdrawal of the proposed exemption from the higher rates for significant investors.
This change impacts significantly on the buy-to-let market and landlords, but there will be others who will be caught by the changes.
For purchasers where there is a delay selling their main residence, and it hasn’t been sold on the day they complete their new purchase, they will have to pay the higher rates of stamp duty on completion of their purchase. However, they will have 36 months to claim a refund for the higher rates if they then sell their previous main residence. Purchasers will also have 36 months between selling a main residence and replacing it with another without having to pay the higher rates.
A small share in a property which has been inherited within the 36 months prior to a transaction will not be considered as an additional property when applying the higher rates.
You will also pay the higher rate if you buy a residential property in England, Wales or Northern Ireland and you already own one outside these countries.
While the potential to reclaim the higher rates provided the main residence is sold with 36 months is welcome, it does still put people in a position where they will potentially have to find a significant extra sum of money to complete. A particular concern is for couples who decide to separate, but cannot sell their main residence or one party cannot be released from the mortgage.
If you are purchasing any properties jointly with other people and any of them already own one or more properties, you’ll need to pay the higher rates.
If you’re married or in a civil partnership, buying a property and your spouse or civil partner already owns a property, you may still be liable for the higher rates. Married couples and civil partners living together are treated as one unit. This means any homes owned by either partner will be included when the stamp duty is calculated on the purchase of another property. But you may be able claim a refund if they then go on to sell it. The same system applies for joint purchasers so cohabitees are not at any advantage.
For partners, similar situations can arise. If two people are in the process of purchasing a property jointly which will be their main residence, and one of them currently owns another property which they rent out but their partner is a first time buyer, the higher rates will apply to the total purchase price.
So, while on the face of it many people may think this change will only affect investors, the implications may be significant for others who, from the headlines, are unaware they will need to potentially pay thousands of pounds in additional stamp duty.