How taxing can it be?

2015 Summer Budget changes to property and tax

We run you through the ins and outs of the three changes regarding property and tax.

Rent a room relief
This relief applies to private landlords, the owners of guesthouses and similar establishments, provided that they use the property as their main or only home. From April 2016, the exemption will increase to £7,500 per household (years to 2015/16 £4,250 per household). There will still be no requirement to declare income if it’s below this threshold.

Inheritance tax
The finance bill introduced an additional nil-rate band when a residence is passed on death to a direct descendant. This will be:

£100,000 in 2017 to 2018
£125,000 in 2018 to 2019
£150,000 in 2019 to 2020
£175,000 in 2020 to 2021

It will then increase in line with Consumer Price Index from 2021 to 2022 onwards. Any unused nil-rate band will be transferred to a surviving spouse or civil partner. It will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.

Parents and grandparents will be able to leave homes worth up to £850,000 to their children without them paying inheritance tax from 2017, rising to £1 million by 2020.

The move, first pledged as part of the Conservative Party pre-election manifesto, means that once fully in motion, each parent will be able to leave £500,000 in property – up from the current £325,000 per person – without paying the tax. As allowances can be passed from one deceased partner to the other, when the first dies, their £500,000 allowance transfers to the other, giving the survivor a £1 million allowance.

Buy to let – Restriction of mortgage interest relief
Currently mortgage interest may be deducted from rents income to arrive at profit or loss for tax purposes and income tax relief is given at a taxpayer’s marginal rate of tax. The changes proposed are to restrict mortgage interest relief to the basic rate, and to give the relief as a tax reduction, not an allowable expense. The measure is to be phased in between 2017 and 2020. Individuals will be able to claim a basic rate tax reduction from their Income Tax liability on the portion of finance costs not deducted in calculating their rental profit. This tax relief will be calculated as 20% of the lower of the:

  • Finance costs not deducted from income in the tax year (25% for 2017 to 2018, 50% for 2018 to 2019, 75% for 2019 to 2020 and 100% thereafter)
  • Profits of the property business in the tax year
  • Total income (excluding savings income and dividend income) that exceeds the personal allowance and blind person’s allowance in the tax year
  • Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year

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About Julia Maltby
Julia’s award-winning business Accountancy Plus has been crunching numbers and saving fortunes for over 22 years and specialises in the creative industries. Julia seriously lives for accounts, VAT, bookkeeping, business and tax planning and tax returns. There’s no accounting for taste. Time-honoured personal services from her team for both business and private accounts.