It is easy to lose track of recent budget changes as a number have been introduced gradually over several years, such as the change in capital gains tax. Some changes were also announced in the March budget, which took effect in the 2024/25 tax year, while others have been delayed until the next tax year. In this article, we will look at recent changes, how these may impact the actions of property investors, and how to reduce their effect on your returns.
Removal of multiple dwellings relief
Multiple dwellings relief has been a controversial topic, allowing investors to reduce their Stamp Duty Land Tax (SDLT) liability when purchasing more than one dwelling in a single or linked transaction. Under the legislation, investors were able to use the average cost per flat as a means of reducing their SDLT charge.
From 1 June 2024, the relief will be abolished, and the combined purchase price of the properties will be used to calculate the SDLT, which could see some investors paying a much higher rate than under multiple dwellings relief. The change won’t impact investors acquiring properties of the same value nor those acquiring a mix of residential and non-residential, for example, a flat above a shop, who can still apply for non-residential SDLT, which is capped at 5%.
Investors who exchanged contracts before or on 6 March (budget day) will still be able to take advantage of the relief – provided the contract is not modified after this date.
Change in residential property capital gains tax rates
The Chancellor also announced a surprise change in the higher rate of capital gains tax charged on residential property profits. On 6 April 2024, the rate was reduced from 28% to 24%, prompting many investors to delay exchanging contracts until after 5 April to take advantage. The basic rate of capital gains on residential property profits remains unchanged at 18%.
As a side note, it’s important to remember that the tax on the sale of UK residential property should be paid within 60 days of completion. Those who wait until their next self-assessment date may be in for an unwelcome surprise, with fines ranging from £100 if they miss the 60-day deadline to £300 (or 5% of the outstanding tax) if they miss the date by more than six months.
Reduction of capital gains tax allowance
In his Autumn Statement in 2022, Chancellor of the Exchequer Jeremy Hunt announced plans to reduce the capital gains tax allowance of £12,300 per person. Consequently, it fell to £6000 in the 2023/24 tax year and was cut further to £3000 on 6 April 2024. There are no published plans to reduce the capital gains tax allowance any further, but as we know, these plans can change very quickly.
Changes to furnished holiday let rules
While changes to the furnished holiday let rules are in the pipeline, the good news is that they will not be effective until 6 April 2025. Those who may be impacted by the changes have several months to adjust their investments to reflect future legislation. There are many issues to consider, such as the removal of-
- Higher rate tax relief on 100% mortgage interest costs
- 10% capital gains tax on property sales
- Capital allowances on furniture, fixtures and fittings
- Property-based “net relevant earnings” for pension contributions
In a case of the Chancellor giving with one hand and taking with the other, for higher rate taxpayers, the rate of capital gains tax will increase from 10% to 24% (recently reduced from 28%) in the next tax year.
Those who will be disadvantaged by the changes in April 2025 have several potential options, and it is vital to speak with your accountant and financial adviser. In effect, the furnished holiday let regulations are being brought into line with the buy-to-let sector.
VAT registration threshold increased
In a welcome reduction of the impact of fiscal drag, the Chancellor announced that the VAT threshold will rise to £90,000 from 1 April 2024, the first increase since 2017. Over that time, the traditional inflation-adjusted rate would now stand at £108,000, which has prompted a significant increase in government VAT income. The deregistration limit also changed on 1 April 2024, rising to £88,000.
This change in the VAT threshold has reignited the old argument about holding back a company to avoid VAT registration. While the argument is legally unstable, it also prompts the question: While holding back to avoid VAT may have saved some money, how much growth has been lost in the business?
Higher income child benefit charge threshold
As indicated in the March budget, the higher income child benefit charge threshold increased from £50,000 to £60,000 from 6 April 2024. Landlords will be well aware of section 24 regulations, which dictate that mortgage interest and arrangement fees cannot be deducted from rental income prior to calculating tax liabilities.
The increase in the threshold to £60,000, with child benefit gradually repaid between £60,000 and £80,000, will assist those who hold property in their own name. While a relatively minor victory for landlords, it is welcome in the current environment of seemingly ever-increasing tax liabilities.
Extension of IHT relief for agricultural property
In a below-the-radar release, after the budget speech, it was confirmed that the inheritance tax relief available on agricultural property will be extended. From 6 April 2025, the regulations will include land managed under an environmental agreement with or on behalf of:-
- UK government
- Devolved administrations
- Public bodies
- Local authorities
- Approved responsible individuals
As part of the agricultural property relief legislation, it may be possible to claim up to 100% tax relief against qualifying property. Currently, there is no guidance on the treatment of income from these arrangements, but this will be confirmed in due course.
Reserved Investor Fund
There was an interesting development regarding Reserved Investor Funds, a new investment structure to encourage investment in UK-based real estate. While further details will be announced in due course, introducing these unauthorised contractual schemes will reduce costs and add a much-needed degree of flexibility – above what is available through existing authorised contractual schemes.
Summary
The introduction of ongoing legislative changes, immediate changes, and those planned for the future can make it difficult for property investors to keep track. It’s essential to be able to plan and look to the future with confidence, ensuring that you are protecting your assets and maximising returns.
While these changes are significant in isolation, the cumulative impact will reshape the landscape for many property investors. Whether you are looking to enter the property investment market, adjust your investments to protect yourself from ongoing changes, or even convert to company status, there is much to consider. It is important to speak with your accountant on a regular basis to ensure that you are taking appropriate action as soon as possible.