Fiscal & Regulatory Outlook
Autumn 2015

The 2014 Autumn Statement has clearly targeted the non-doms and the top-end house buyers with changes in the Stamp Duty Land Tax (SDLT) rates and the introduction of Capital Gains Tax (CGT) for non-UK residents disposing of UK residential property. In addition to these changes, the Summer Budget on 8 July 2015 provided further details on the proposals on new Inheritance Tax (IHT) rules on UK residential property held indirectly by non-UK domiciled individuals (non-doms) or by excluded property trusts.

IHT Changes for UK Residential Property Owned by Non-doms – From April 2017 all UK residential property held directly or indirectly by foreign domiciled individuals or excluded property trusts will be within the scope of UK inheritance tax (IHT).

The extension of IHT in these cases will broadly be in line with the Annual Tax on Enveloped Dwellings (ATED) but, unlike the ATED regime, there will be no £500,000 minimum threshold and ATED reliefs for let property will not apply. However, it is intended that the same reliefs and charges will apply as if the residential property was held directly by the owner of the company (e.g. spouse exemption) and there will be no IHT charge for diversely held vehicles that hold UK residential property. The government has accepted that there will be complications when implementing these changes and we are waiting to see further details.

The announcement is a further restriction on the tax advantages open to non-doms. If followed through it will significantly reduce the benefits of owning UK residential property via offshore companies (or other opaque entities), whether personally or through a trust.

Many non-resident and non-domiciled individuals and trustees will have already considered de-enveloping existing structures when ATED and ATED-related CGT were introduced – and extended – but decided to maintain the structure due to the IHT advantages and confidentiality offered.

Those individuals and trustees will now need to reconsider their position and the potential costs of de-enveloping following the extension of CGT to non-UK residents.

The Summer Budget also introduced changes that will restrict relief for finance costs on residential properties to the basic rate of Income Tax.

Income Tax Changes for Residential Letting – The government has moved to restrict the amount of interest which can be deducted by individual landlords of residential property when calculating their income tax liability. Under current rules, if the landlord is a higher or additional rate income taxpayer, then any interest on a loan taken out to acquire the let property will be deductible in full when calculating the individual’s income tax liability. So if an individual pays income tax at the top rate of 45%, this effectively saves the individual a sum equal to 45% of the interest paid. The new rules will restrict the amount of tax relief to the basic rate (currently 20%), even if the landlord is a higher or additional rate taxpayer. The restriction will be in full force from the 2020/21 tax year, but will be phased in with effect from the 2017/18 tax year.

It is also proposed that the so-called “Wear and Tear Allowance” for furnished residential lets will be replaced by a new relief which will allow a percentage of the actual expenditure on furnishings to be deducted when computing taxable profits. The benefit of the current regime is relative simplicity: the Wear and Tear Allowance is broadly calculated as 10% of rents less certain expenses incurred by the landlord such as Council Tax. With effect from April 2016 this will be replaced by the new relief, which will be based on actual expenditure and will certainly be more complex. The government has promised to issue a technical paper on this in the summer.

The restriction on the amount of interest which can be deducted for tax purposes is only relevant for individuals owning buy to let properties. It does not apply to commercial property. It is also not relevant for companies, including offshore landlords who own their property through non-UK resident companies: these will always be liable to income tax on rental profits at the basic rate anyway.

    • Mischon de Reya Summer Tax Update 2015