Tax changes due from April 2017
One of the less endearing habits of Chancellors, regardless of political hue, is to announce tax changes which are deferred for a year or even more. This might be to delay a cost to the Exchequer or in the hope that a tax increase gets forgotten. Mr Hammond served up some deferred measures, but for April 2017 there are two from his predecessor worth remembering:
Inheritance tax residence nil rate band
The residence nil rate band (RNRB) was promised in the 2015 Conservative manifesto, where it was described as ’increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million, with a new transferable main residence allowance of £175,000 per person’. It sounded simple at the time, but the legislation proved to be hugely complex. The chairman of the Treasury Select Committee was prompted to write to the Chancellor saying ’Tax rules should aim to be simple, fair and clear. I am concerned that the RNRB announcement meets none of these tests.’
The RNRB starts from 6 April 2017 and initially is worth only £100,000. It will rise by £25,000 a year to reach £175,000 in 2020/21, shortly before the next election is due. Very broadly speaking the RNRB is equivalent to an extra £100,000 on the nil rate band, but it only applies to residential property (or assets replacing that property on downsizing) passing to lineal descendants on death. The RNRB is subject to taper for estates over £2m and, like the ordinary NRB, any unused element can be effectively inherited by a surviving spouse or civil partner.
Tax relief on buy-to-let mortgages
In the first Budget after that 2015 election which the Conservatives won, George Osborne announced two measures aimed at cooling the buy-to-let market. The first, the replacement of the 10% wear and tear allowance, took effect from April 2016. The other, a four-year phased reform of the tax relief on mortgage interest, begins from 2017/18. In the first stage, a quarter of interest payable will cease to be allowable against rental income and instead the borrower will receive a 20% tax credit on that portion of interest.
This is an unwelcome two-edged sword if you are a buy-to-let investor:
• If you pay tax at more than basic rate, then the tax relief you receive on interest payments will be less. Ultimately, most higher rate taxpayers will see their mortgage interest tax relief halve by 2020/21.
• Because the interest deduction against rental income is being tapered away, your total income (including rent net of expenses) will increase. This could mean extra tax because you move into a different tax band or the extra income takes you over a tax threshold, eg the £50,000 ceiling above which child benefit is effectively taxed.
ACTION
It is generally best to plan for tax changes before they take effect, rather than once they are in force.
The RNRB’s arrival is a good reason to review your estate planning. For example, it may no longer make sense to pass everything to a surviving spouse on first death. Similarly, the reduction in buy-to-let interest relief should prompt a re-assessment of the structure of property ownership and even whether the investment remains worthwhile, especially as interest rates could rise from current low levels just as tax relief drops.