Closing the door on residential tax relief

In recent months, the government has made announcements that will see significant changes to tax and residential property:

Non-residents and Capital Gains Tax
Subject to certain exemptions, all non-residents will be subject to UK CGT on gains arising post 5 April 2015 on the disposal of UK residential property. The only concession is that the cost of the properties for CGT purposes will be rebased to their market value at 5 April 2015, meaning no tax will be paid on an increase in value prior to that date.

Restriction on interest deductions
New measures have been introduced that restrict relief for finance costs on let residential properties. These are being introduced gradually from 6 April 2017. From 2020, tax relief will only be given at the basic rate, meaning the measures will have a harsh impact on higher and additional rate tax payers.

Unlike the current rules which stipulate that mortgage interest can be deducted in arriving at the profit or loss on a property, the new rules will calculate relief for the mortgage interest separately. For higher and additional rate taxpayers, this will work to reduce the allowable deduction for mortgage interest, so that any relief is restricted to the basic rate band (20%).

Inheritance Tax and Foreign Domiciled Individuals
From April 2017, all UK residential property held directly or indirectly by foreign domiciled persons will be brought into charge for Inheritance Tax ("IHT") purposes, even when the property is owned through an indirect structure such as an offshore company or partnership. This could result in foreign domiciled persons being liable to pay a 40% tax liability in respect of the market value of UK residential properties held (directly or indirectly) by them on their death.

Additional 3% Stamp Duty
Under proposals announced in the Autumn Statement, additional Stamp Duty charges could apply to the purchase of second homes. From 1 April 2016, a surcharge will be added to all Stamp Duty rates for residential property, where the purchaser already owns one or more UK properties. The stamp duty surcharge will lift each band by 3%. For instance, properties worth between £125,000 and £250,000 currently attract stamp duty of 2%, but the changes mean those with more than one property will pay 5%.

It is proposed that the higher rates will apply to all contracts entered into after 25 November 2015, where completion takes place on or after 1 April 2016.