UK buy-to-let tax and SDLT changes

cottageSignificant tax changes are on the way for anyone buying a second home or a buy-to-let property in England & Wales. The Scottish and Northern Irish Governments have also unanimously backed the changes, which will come into effect from 1 April 2016.

Robert Jamieson TEP explained the new changes in a STEP seminar for tax planning for businesses held in London on 22 February.

Under the current rules, you are entitled to claim all of the mortgage interest that you pay against the income of your buy-to-let property, and then only pay tax on the remainder, whether it is the basic rate of 20 per cent or the higher rates of 40 per cent and 45 per cent. Other valid expenses can also be deducted before the tax is payable.

However, from next year the calculation of the tax relief is going to be greatly reduced to a flat rate of 20 per cent on the whole income of the property. This will be slowly phased in from 2017 and by 2021 the rules will be fully enforceable. Landlords who pay the basic rate of 20 per cent will see no change, whereas the higher rate tax payers of 40 per cent or 45 per cent will lose 50 per cent or more on their tax relief. These rules do not apply to owners of furnished holiday accommodation or to landlords of rented commercial property (S24 F(No2)A 2015).

From 1 April 2016, higher rates of Stamp Duty Land Tax (SDLT) are also being introduced resulting in an additional 3 per cent on top of the fixed 2014 rates which will be charged on the purchase of both second homes and buy-to-let properties. The Chancellor George Osborne quoted ‘People buying a home to let should not be squeezing out families who can’t afford a home to buy. So I am introducing new rates of stamp duty that will be 3 per cent higher on the purchase of additional properties like buy to lets and second homes.’

This increase significantly inflates the stamp duty tax on a GBP275,000 buy-to-let purchase from GBP3,750 to GBP12,000.

The Chancellor has also proposed that from April 2016, ‘wear and tear’ costs will only cover furnishings that have actually been replaced or repairs that have been carried out, with receipts to evidence the expenditure. The current rules are that landlords are given a wear and tear allowance regardless of how much of it they actually use.

These imminent reforms are making it far less attractive for individuals – or financial entities – to invest in second homes and buy-to-let properties. There are, however, two ways in which these charges can be mitigated by using S116(7) FA 2003 ‘multiple dwellings relief’, or the more complicated partnership or LLP arrangement set out in Schedule 15 FA 2003.

Nonetheless, the new rules will disincentivise most landlords from investing further in a rental portfolio when the scope for profit has been cut so significantly.

 

Emily Deane TEP is Technical Counsel at STEP

Strategy at STEP

David Harvey, STEP Chief ExecutiveNext week will be a busy week at STEP in helping shape the future strategy of the Society.

First of all the Board, working closely with STEP staff, will be having a two day planning session here at London headquarters looking at the strategic challenges facing the Society and its members and how best STEP should position itself to help members meet these challenges.

To help the Board through this process they will hear from a variety of ‘expert witnesses’ comprising practitioners in both the offshore and onshore world as well as regulators and major employers. This format was first trialled last year and was highly successful in enabling the Board to take a well-informed view of future likely developments and risks in the industry.

Following the Board meeting, there will also be a full day meeting for England & Wales STEP Branch Chairs. Again the focus will be on the strategic outlook for STEP and our members and what STEP can best do to help our members through a time of rapid change. I am delighted that His Honour Judge Denzil Lush has agreed to speak at this meeting.

Also next week, senior members of the secretariat will participate in the STEP Canada Board Conference call on many of the same topics.

For the team at STEP Worldwide, these meetings are a great opportunity to talk through the key issues facing members and develop a strategy to meet member needs not only for the rest of this year but in the longer term too.

We are always keen to hear from members about the issues they feel STEP should be focused on, what we are doing well and what we could do better. So, even if you are not involved in next week’s meetings, I invite you to get in touch and make your views known.

David Harvey, STEP Chief Executive

STEP Will Code revision published

Alex Elphinston STEP’s Professional Standards Committee recently approved some revisions to the STEP Code for Will Preparation in England & Wales, which applies to all STEP members drafting wills in England & Wales.

Please find below a Q&A, which addresses the revisions and answers some common queries. If you have any questions about the Code please contact STEP’s Professional Standards Manager, Sarah Manuel on standards@step.org.

What is the point of the Code, and how does it benefit members and their clients?
The Code seeks to assist both the public and the STEP member by setting out a framework within which a will can be developed. By following the Code, you are able to demonstrate openness and transparency in the management of your client and they can be confident that you are following best practice. Following the Will Code also enables the public to identify that the person drafting their will is appropriately qualified and competent and abides by an ethical code.

What has changed in this revision?
The revisions are mainly typographical, with only one change of substance, which is to emphasise that members must make their clients aware of the existence of the Code and their adherence to it, and provide a copy of the Code to the client in an accessible format. We are flexible as to how members do this; whether by direction to the website (listed in the guide to the public) or by supplying a full copy to each client.

What feedback has STEP received from members about the Code?
Feedback from users has largely been positive with members finding the Code a helpful tool when drafting wills, although you would like greater public awareness of the Code’s existence. We will be looking into how we can achieve this over the coming months, but one easy way is for all full STEP members in England and Wales to display the Will Code logo.

Has STEP had any feedback from the public?
Much of STEP’s interaction with the public sadly comes when things have gone wrong between a member and their client and we receive a complaint. Recent complaints have highlighted issues around the lack of knowledge by both members and the public regarding the content of the Will Code. The complaints we have received have focused on the fees being levied, and the need for clear communications. In these cases, issues could have been avoided had the Code been followed by the members and had the clients been made aware of the Will Code’s existence. This is the key reason we have changed the guidance to ensure clients are aware of the Code.

Is there any information members can give to clients to explain what the Code is?
We have developed a Guide for the Public (PDF 110KB) that you can download from our website, which describes the standards that, as a STEP member, you will adhere to when drafting their will along with the considerations that they can expect you to have taken into account.

Who is eligible to use the Will Code logo and where can it be displayed?
The logo can be used by all TEPs in England and Wales; and Technicians, Affiliates and Students of STEP who have successfully completed the Advanced Certificate in Will Preparation. The logo can only be used by the individual STEP member and not by a firm as whole, nor should it be used in order to endorse a specific product. We have produced some Rules for use of the Will Code Logo (PDF 70KB), which provide helpful information to ensure you comply with our marketing guidelines.

What if there is a conflict between what the Code says and a member’s firm’s policies?
The Code has been deliberately designed to be a guide to best practice and therefore it is unlikely that a firm would not wish its members to follow the Code. The Code is a framework within which each STEP member can aim to best meet the needs of each individual client, while at the same time operating to appropriate standards. It does not set out a detailed and prescriptive procedure for will preparation. Ultimately the Code is designed to increase confidence and provide assurance to the public that their will drafter is appropriately qualified, will provide a good service and to make the process far less daunting than it may otherwise seem.

What if a complaint is raised against a member?
Where possible we would hope that any matters can be resolved locally without need for STEP to become involved. Sometimes this may not be possible and a client or member of the public may have cause to complain to us directly. When this happens we will consider the complaint under our usual Disciplinary Rules in order to determine whether a breach of one or more of our Codes of Conduct has occurred. We do understand that being notified of a complaint can be a stressful and upsetting experience and so early contact with the Professional Standards team is advisable.

Alex Elphinston TEP is Chair of STEP’s England and Wales Regional Committee

The OPG: How solicitor deputies should manage deputyship accounts

Emily Deane, Technical Counsel at STEPThe Office of the Public Guardian in England and Wales published a practice note on 15 February 2016 (below) clarifying how solicitor deputies should manage deputyship funds. Whilst the information is widely understood as best practice, it is a helpful reminder regarding the administration and management of deputyship accounts.

The law states that all deputies should keep their clients’ money and property entirely separate from anyone else’s, and that includes solicitors’ client accounts. The Solicitors Regulation Authority and Mental Capacity Act Code of Practice also uphold that funds should not be combined with other people’s. This is to circumvent client funds being used fraudulently or for money laundering purposes.

The direct advice from the OPG is stated at Standard 1a(9), ‘Open a deputyship account in the client’s name with the deputy named as such on the account. Ensure that all funds held for the client are held in accounts and/or investments in their name and kept separate from the funds of the deputy or other parties.’

The exception to this rule is during the initial period, when you are setting up a client’s separate deputyship account, and in this provisional period you may hold their funds in a general client account as a temporary measure. The MCA Code of Practice advises that there would have to be a very good reason for mixing the funds with other clients other than during the initial administration stage. The funds should be segregated at all other times.

The OPG offers comprehensive guidance in its guide SD3 How to be a deputy; the basic message being that you should get to know your client as well as you can, so that you can act in their best interests. If your client is seriously incapacitated you should find out more about them through their friends and family. The decisions that you make about their finances should be in line with the nature of their existing investments and the size of their estate.

The OPG advises deputies, ‘There will be cases where large balances in a client account will not represent the best investment strategy for a client. In these cases the OPG will question the appropriateness of keeping significant excess funds in this way.’

STEP recommends that if the client no longer has mental capacity, you need to take into consideration the financial decisions that they made when they did have capacity, and if they have lucid moments, discuss their financial wishes at that time.

The practice note reinforces the principle that solicitors acting as deputies should be managing their clients’ funds ’with the best interests of their client in mind,’ at all times.

Emily Deane TEP is Technical Counsel at STEP