The budget news that affects property investors
Set for it to make big investment news, Philip Hammond’s first budget as the UK’s Chancellor of the Exchequer raised very few eyebrows. At 64 pages, the Budget Report 2017 is less than half the length of the Budget Report 2016. In fact, there was a total of only 28 announcements made by the Chancellor during his nearly hour-long speech.
Having said this, there are a couple of statements which will impact property investors. These are likely to be dissected in the investment news in the coming days. Before we discuss them, it’s worth considering the UK property tax changes that have been previously announced. Unfortunately, Mr Hammond didn’t rescind these:
Previously announced buy-to-let tax changes
Mortgage interest tax relief is being slashed
From April, the amount of mortgage interest tax relief a property investor can claim is being reduced. The way that tax is calculated on rental income is also altered.
The tax due will now be calculated by reference to your gross rental income after tax deductible expenses, such as investment property management costs.
Tax relief on your mortgage interest can then be deducted. However, the amount of tax relief you can claim will be reduced to 20% by 2020/21. It will impact higher rate taxpayers. You’ll find a full explanation of this in our article “How mortgage interest tax relief is changing”.
No U-turn on letting agent fees
In the Autumn Statement, the Chancellor announced that letting agents would no longer be able to charge their tenants upfront fees. These costs covered work such as preparing tenancy agreements, referencing and credit checking. Citizens Advice said that they averaged around £340 per tenancy.
Property investors might expect these costs to be passed on to them. Ultimately it will be the tenants who pay, as four in five letting agents have said they expect rents will rise because of this.
As expected, the Chancellor hasn’t had a change of heart. The abolition of lettings fees on tenants will remain.
Budget 2017 – the good and not so good for property investors
Now, to the Budget statement. Mr Hammond gave a bit away and took a bit back. It was a Budget that neither excited nor horrified:
- The personal tax allowance will rise to £11,500 from April. By the end of this parliament, it should have increased to £12,500.
- There will be extra duties on some spirits, and the price of a pack of 20 cigarettes will increase by 35p.
- There is funding for 110 new free schools and a new ‘T-level’ qualification in technology.
- £200 million will be made available to aid the expansion of superfast broadband.
- £2 billion is being pumped into social care.
- £435 million is to be made available to help businesses hit by the latest round of business rate rises imposed by councils, predominantly in the South of England.
All pretty standard stuff. Now we get to the investment news that could impact you as a property investor:
Economic growth is speeding up
The forecast for GDP growth has been revised upwards for this year, from 1.4% to 2%. It’s now expected that the economy will grow by between 1.4% and 2% in each of the next five years.
It should create more jobs, and help to push wages up. More jobs and more wages mean more demand for homes. It may be easier to push rents up, and property prices should continue to rise.
Infrastructure spending gets a boost
Mr Hammond announced several infrastructure spending initiatives, including:
- £90 million for the North and £23 million for the Midlands to tackle ‘pinch points’ on the national road network. It should make commuting by car and freight transport easier. Another positive for property investors.
- A £690 million competition for local authorities to tackle urban congestion. It could lead to more innovative transport solutions for inner cities and city centres. More cycle routes and pathways. Fewer cars are clogging up city-centre roads. More open spaces. Previously highly congested urban areas could become more attractive for property investment, as infrastructure spending increases and city centres become more people and resident-friendly.
While extra spending on infrastructure and more robust economic growth are good for property investors in the UK, not so good was an announcement about dividends.
The value of dividends is cut again
Last year the government introduced new dividend rules. These rules cut the tax benefits of dividends. They meant that property investors who set up a limited company to invest in property could take £5,000 of dividends before being taxed.
With the other tax changes that had been introduced, investing in property through a limited company structure became appealing. Though profits made would be subject to corporate tax at 20% (which is reducing to 17% by 2020), a higher rate taxpayer could take £5,000 without paying tax at a higher rate. In effect, a higher rate taxpayer would save £1,000 of tax on their £5,000 dividend. For a married couple investing jointly in a limited company structure, the tax savings could be £2,000.
The Chancellor has announced that from 2018, only £2,000 of dividends will be tax-free. For a higher rate taxpayer investing in property as a limited company, this tax change means a hefty increase in tax payable.
Overall, a dull budget with a nasty kick in the proverbials from April 2018. Stronger growth and higher infrastructure spending make good investment news, but higher rate taxpayers may need to reassess how their property investments are structured.
For more information about other budget news, you might like to read:
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