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The headline Budget announcement that CGT will be cut to 20% for trustees and higher rate taxpayers and to 10% for basic rate taxpayers may have raised a cheer from investment property owners in Aberdeen. As always, the exceptions are contained in the detailed budget summary.

The summary provides that current rates of CGT (28% and 18%) will remain for residential properties so the move will not assist owners of investment properties and those with second homes.

The Scottish Government previously announced that from 1 April 2016, a Land and Buildings Transaction Tax surcharge of 3% will apply to purchases of second residential properties worth over £40,000.

Changes to “wear and tear” relief will be introduced on 1 April 2016. Currently individuals can deduct 10% wear and tear from annual rental income before tax is calculated. From 1 April 2016 it will only be possible to deduct the cost of actual repairs. Retaining receipts will be essential.

From 6 April 2017, changes will be phased in to restrict relief landlords can receive on mortgage interest to the basic rate. Landlords presently claim relief at their personal rate. Higher rate taxpayers claim relief at 40%, additional rate taxpayers at 45%. After introduction, a tax credit of the 20% basic rate will be applied. This will increase tax payable by landlords who have borrowed to finance investment purchases.

The CGT changes in the Budget, and those outlined above, appear a concerted effort to discourage landlords and holding second properties. This is particularly the case following the recent sustained period of additional regulations pertaining to rentals, imposing increased costs and penalties, and restricting landlords’ rights.

In areas where there is a high demand for rental properties, a reduction in investment purchases will inevitably lead to a shortage of private rented property and consequently higher rents. Those buying investment property tend to be active in the lower to middle market. Activity is likely to be depressed across the board, as a lack of buyers there will prevent trading up to larger properties.

So all-in-all, not too much cheer for the housing market in yesterday’s Budget, although it does contain wider positive changes for tax planning. More on these changes will follow in upcoming bulletins.

Should you wish to discuss any of the above matters further, please do not hesitate to contact a member of the Private Client Team.

Chambers UK 2018

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