Archive for the ‘Property’ Category

HMT Consultation Paper – New Tax Rules for Residential Properties over £2m

Wednesday, June 6th, 2012

HM Treasury has recently published its Consultation Paper on the new property taxes first outlined in the Budget earlier this year.

See below a brief overview of the main suggestions.  The consultation period runs until 23 August.

  • Since the Budget in March, Stamp Duty Land Tax of 15% already applies to new purchases above £2m in value by “certain non-natural persons”;
  • It is also proposed that an annual tax charge and CGT will apply from April 2013 on property owned by “non-natural persons” and “non-resident companies”;
  • The main areas for consultation seem to be around the scope of the 15% tax rate and how bona fide developers might be exempt.

The annual tax charge proposals are roughly as follows:

  • The annual tax charge will range from £15,000 (on properties worth £2-5m) to £140,000 (on properties > £20m), increasing annually in line with Consumer Price Inflation (“CPI”);
  • Property values will be set at April 2012 or date of purchase (if later).  They will apply for 5 years (2013-18) and then be updated for a further 5 years;
  • The annual charge will apply to companies (with some exceptions) but not trusts.

The Capital Gains Tax (“CGT”) proposals are roughly as follows:

  • CGT will apply to the sale of property by non-resident companies;
  • They are consulting on whether CGT should also apply to sales by offshore trusts;
  • CGT will also apply where shares in the company itself are sold;
  • CGT will apply to historic as well as future gains;
  • The rate of CGT hasn’t been set and is open to consultation.

Interestingly, though, the Exchequer expects the impact of the CGT rules on overall tax receipts to be ‘negligible’ (whereas on the SDLT and annual charge, there is expected to be an increase in tax receipts).

In our view, these changes are very significant.  It is definitely worth reviewing existing arrangements as soon as possible, although subject to the caveat that this is still in the consultation phase so the rules are likely to change.  Specific actions should therefore be left until the rules have been clarified (hopefully later in 2012 or early 2013).  While the new rules are specifically designed to encourage the unwinding of these ‘envelope’ structures, consideration does also need to be taken of other (non-tax) reasons for holding a property in this manner (particularly the issue of privacy).

 

Image copyright: Peter Thwaite and licensed for reuse under this Creative Commons Licence.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Not all areas of Tax Planning are regulated by the Financial Services Authority.

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Japanese Knotweed in Islington – the mortgage perspective

Friday, May 4th, 2012

Japanese Knotweed

A recent Islington mortgage case I worked on has highlighted two words that should strike fear into any homebuyer or homeowner: Japanese Knotweed.

It might sound exotic, it might even look quite pretty. But beware, this is no trivial matter. In fact, having spoken to a number of experts, it definitely sounds more ‘Triffid’ than ‘trivial’.

The problem is that this is a very aggressive plant, growing at a rate of up to 10cm a day. In doing so, it can push through concrete. Which, as you can imagine, is a potential risk if you own and live in a property with an infested garden. In my recent enquiries, I’ve heard stories of it coming up through living room floors.

It also grows in just about any soil type and it is highly contagious (spread through the roots and branches rather than airborne spores). Tearing up the roots is an industrial-sized job, since even the smallest remnant – as little as 0.7 grams – can be enough for it to grow back.

The good news is that treatment is possible, but it is intensive and requires regular reapplications over a prolonged period (preferably 24 months). Some companies can provide guarantees, typically five years (or longer, albeit at additional expense).

Altogether, any risk to structural integrity is a major risk to any mortgage lender looking to use a building as security against a loan for a period of 25+ years.As a result, most lenders will run a mile at the first sign of Japanese Knotweed (even in neighbouring properties).

And therein lies a major problem. If lenders aren’t willing to lend, then buyers, sellers, estate agents and re-mortgagers all have a major problem.

Fortunately, treatment processes have improved recently and there are a handful of lenders now willing to take a slightly more pragmatic approach. However, don’t underestimate the challenges: treatment must be underway, the weed must be away from the buildings and (perhaps the hardest to judge) the surveyor must be satisfied.

If you find you yourself with a Japanese Knotweed problem where you need a mortgage or a remortgage, please get in touch.

We have recently identified three lenders willing to consider applications on a case-by-case basis. All may not be lost, but do be prepared for a laborious (and potentially expensive) process. We can also put you in touch with an eradication specialist.You will need to take the following steps:

  • Ensure a proper treatment programme is underway
  • Focus on the weeds nearest the building first
  • Don’t cut corners
  • Get guarantees for as long as you can (lenders would like to see guarantees extend beyond the term of their mortgage)
  • Be as transparent as possible, particularly with the surveyor. Don’t try to pull the wool over anyone’s eyes as when you come to sell you could be liable for misrepresentation if you don’t declare it.

 

If Japanese Knotweed affects you (in Islington or any other London borough), please do not hesitate to get in touch on 020 7125 0224 or enquiries@kennedyblack.com

Please also take a look at the following blog which outlines some of the legal perspectives from local solicitor firm Bolt Burdon: www.boltburdon.co.uk/sitecore/content/BB/Global/Blogs/A%20Knotty%20Problem.aspx (This link takes you to an external website.  We are not responsible for its content.)

 

Image Source: NNSS (Crown Copyright)

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Budget 2012 Summary

Wednesday, March 21st, 2012

Much like last year, the weather has been very kind to George Osborne on Budget Day.

Please find below an brief overview of the main points, with some thoughts and opinion thrown in. Hope it’s useful.

Like the weather, the overall message this year was much the same as last year. While austerity remains the order of the day, I can’t help but think that there was a slightly more positive spin to this year’s announcements. This has been helped by slightly better-than-expected growth figures from the Office for Budget Responsibility, meaing the UK will technically avoid a recession (this time).

However, I’m going to christen this the “Wallace and Gromit” Budget. Tax incentives for video games, animation and TV production provided Mr Osborne with an unmissable opportunity to have a quick dig at Ed Miliband. I leave it to you to notice the resemblance.

There seemed to be fewer attention-grabbing headlines in this Budget compared to last year, with many of the main announcements leaked the day before. “Steady as she goes, Gromit,” as Wallace might say.

To highlight some of the more salient points (in no particular order):

- The biggest point in my view is not the change to the 50p tax rate (will will grab all the headlines) but the fact that the Personal Allowance (the earnings below which an individual pays no income tax) will rise to £9,025 from next April, the largest increase in over 30 years. Age-related Personal Allowances for those in retirement will be phased out for new retirees (i.e. anyone born after 5th April 1948). At the same time, the basic-rate tax band will be adjusted so that basic rate taxpayers will get the full benefit, while higher rate taxpayers earning up to £100,000 will see one quarter of the benefit. Only those earning over £100,000 will see no benefit.

- As already alluded to, the additional rate of income tax will reduce from 50p to 45p from April 2013. The 50p tax rate was always touted as a temporary measure, and it seems that HMRC has conceded that a 50p top tax rate has raised little in additional tax receipts (one-third of what they expected). Given the “massive distortions” that the 50p tax rate has created, reducing it by 5p is expected to have no material impact on overall tax receipts.

- there was also a long-overdue clampdown on Stamp Duty avoidance schemes. A new Stamp Duty Land Tax of 15% will apply from today to residential properties worth in excess of £2m held within “company envelopes”. An annual charge may also apply from April 2013. Furthermore, Capital Gains Tax will apply to such properties (even if principal prime residences) from April 2013. The Chancellor also signalled an intention to move retrospectively in respect of the above.

- A new tier of Stamp Duty Land Tax of 7% will apply to properties over £2m in value, starting at midnight tonight. According to Land Registry data, this would have applied to just 121 homes (0.2%) bought in November last year (of which 98 were in London, or 1.3%). Clearly, this will only be effective if the loopholes are closed.

- Corporation Tax rates will continue to reduce, with a further 1p reduction next month (on top of the one already planned). From April, Corporation Tax will hence be 24p (although banks aren’t expected to benefit because the Bank Levy will increase to counteract this reduction) . I commended this change last year and commend it again as a good catalyst for growth. A new Corporation Tax regime for small businesses (turnover less than £77,000) will be implemented on the basis of cash flowing through the business. This should simplify tax returns if nothing else – there is no indication as to whether this might reduce or increase their tax bills.

- A General Anti-Avoidance Rule (“GAAR”) to help clamp down on tax avoidance is set to be introduced in the Finance Bill 2013. This has been mooted for some time, but by its very nature (i.e. ambiguous) is likely to be very controversial and it remains to be seen how effective one might be. The countries with GAARs (e.g. Canada, Australia and New Zealand) don’t tend to be any better off as a result.

- Tax incentives are to be introduced for patents as well as video games, animation and TV production, “to attract Disney and HBO to the UK.” Cue Wallace and Gromit gag.

- The Basic State Pension is to be simplified to a single-tier payment of £140 a week. This has been announced previously and more details are expected in the Spring.

- No change to alcohol and fuel duties. Big increases for tobacco, though (37p on a pack of cigarettes from 6pm this evening).

- There will be a new cap on “unlimited” income tax reliefs (a bit like the Annual Allowance when it comes to pension contributions). For those claiming income tax relief in excess of £50,000, a cap of 25% of income will apply. It’s important to note that this only applies to currently “unlimited” reliefs, so those that currently have limits (e.g. pension contributions, EIS and VCT reliefs) won’t be affected. Personally, I’m struggling to think of genuine examples of “unlimited” income tax reliefs.

- Finally, Child Benefit (currently £80pm for all families) is to be removed gradually for those families where one member earns over £50,000. Those earning over £60,000 will receive no Child Benefit at all. Note that it sounds like Child Benefit will still be paid, but it will clawed back through an income tax charge.

To summarise, if you’re a heavy-smoking higher-rate taxpayer approaching retirement, you’re probably the biggest loser. Especially if you have been or were planning to avoid Stamp Duty on your house in Millionaires’ Row.

 

Image source: The National Archives, No known copyright restrictions.

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To buy or not to buy… that is the question

Wednesday, March 3rd, 2010

With property prices in London pushing back unerringly towards their pre-crisis levels, you would be forgiven for thinking that we never really went through a crisis in the first place.  (A quick visit to your nearest mortgage lender might bring that idea back down to earth, mind!)

Unfortunately, for those people who live in rented accommodation, the question of whether to buy or rent is perhaps as complicated as ever.  Here, therefore, is a quick guide that might help you establish whether you are better off renting or better off buying.

It is possible to compare renting with buying, but as with all comparisons the key is to ensure you are comparing like with like.  The cost of renting is pretty straightforward – just take a look at your bank statement each month.  The comparable cost of buying, on the other hand, is a bit more complicated, and it is made up of three key elements:

  • The cost of the interest payments on the mortgage
  • The opportunity cost of the deposit that you have invested in the property
  • The actual costs of purchasing (e.g. stamp duty, conveyancing costs etc.)

Let’s look at a theoretical example:

Let’s say you rent a furnished flat in London for £2,000 a month.  That’s your cost of renting, plain and simple.

To work out the comparable cost of buying, you will first need to value the property.  You could make friends with a local estate agent and invite them round for a cup of tea and a biscuit, or you could use a more rough-and-ready guide using some useful tools available on the internet.  If the property has been bought in the past ten years or so, then you should be able to find the purchase price online (e.g. http://www.nethouseprices.com or http://www.zoopla.com).  You should then index that price using Land Registry data for your local borough (http://www.landregistry.gov.uk).  In our example, let’s say the flat sold for £250,000 in 2002 and might now be worth £450,000 according to the Land Registry index.

If we assume you have a 25% deposit (to be recommended in the current mortgage market) then to buy this flat you would need to borrow £337,500.  Long-term interest costs on such a mortgage are not easy to estimate, but let’s take a slightly conservative 5% as a guide (current rates particularly at the short end are typically lower than this, although rates will undoubtedly rise at some point).  Your interest payments will hence be around £1,400 per month.

However, you are putting down a deposit of £112,500 and that could earn somewhere in the region of 6% if invested elsewhere (that’s a pretty arbtirary figure, I’ll admit).  The monthly return that you are sacrificing by investing in a non-income producing property is approximately £500.  So your overall cost for comparison is £1,900 per month, right?  Wrong.

The costs of buying a house should not be underestimated.  Stamp duty at 3% and solicitor/valuation costs of probably £2,000 would combine to reach over £15,000 in this instance.  You may intend to live at your property for the full 25 year term of the mortgage, but perhaps five years is more realistic.  That’s roughly another £200 a month to factor in.  Hence, your overall cost of buying is more like £2,100.  Plus, there are other maintenance costs that you might not otherwise have to pay as a tenant.  In this example, there is a clear bias towards continuing to rent and many would argue that property prices look overvalued as a result (The Economist being a notable example, as they run a global house price index and regularly compare the data to the comparable cost of renting).

However, the one very important factor not included here is house price appreciation.  If house prices were to go up further by, say, 6% a year, you might think that would effectively counter-balance the opportunity cost of the investment of your deposit (or may even be offset by a similar 6% rise in rents, effectively cancelling each other out).  However, in actual fact, your exposure to house prices is leveraged (i.e. you are borrowing money to purchase a much bigger asset) whereas your deposit invested elsewhere would probably not be.  If house prices go up by 6% per annum then you make an effective return of 24% (i.e. a price rise of £27,000 on a deposit of £112,500).  In such a situation, your monthly ‘cost of buying’ calculation would plummet to less than zero since you would be making £2,250 a month on the rising value of your home while it would cost you £2,100 a month in interest and other costs.

So it is perhaps unsurprising to learn that, as with all investments, whether to buy or not boils down to an investment decision and your view of whether the investment will go up in value (or not).  The above should serve as a bit of a guide as to whether prices are over-valued or not, but with property prices supposedly rising sharply despite the economic climate, there is no easy answer.

The above is of course a very rough example and should not be taken as anything other than a guide to how the calculations might work in practice.  Feel free to replace the numbers with your own details and you can make the assessment yourself.  Or alternatively, you are more than welcome to ask us to crunch the numbers on your behalf.

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