The Conservative budget announced Wednesday includes changes to tax laws that could affect the property market in the U.K. Here’s an overview:
Abolition of permanent ‘non-dom’ tax status
Background: Currently, it is possible to permanently claim “non-U.K. domicile status” if your father (or your mother, if your parents weren’t married at the time of your birth) was not domiciled in the U.K. when you were born, under what is known as a “domicile of dependency,” said Jamie Morrison, of chartered accountant HW Fisher & Co. Even if you were born or raised in the U.K. and permanently live there, as a “non-U.K. domiciled individual,“ you do not have to pay U.K. tax on your overseas income or on your overseas assets, unless you decide to bring the money into the U.K. The new Conservative Budget would end the “non-dom” status for people who have been living in the U.K for 15 out of the past 20 years. People who were born in the UK to parents who were domiciled in the U.K. will also no longer be able to claim “non-dom” tax status.
Timeline: The changes will take place in April 2017, the Conservative Chancellor George Osborne said.
Cost: Loss of the “non-dom” tax status would mean non-domiciled residents in the U.K. would have to pay U.K. income tax on their overseas income and capital gains tax on their overseas assets when such gains arise, rather than when the proceeds are brought to the U.K. Osborne said the extra funding would raise £7.2bn in extra tax by 2020.
Potential market effect: One question is whether losing non-dom status would prompt some people to leave. Lisa Bevan, a lawyer at Taylor Wessing, said, “many of the non-doms have established family life in London, their children attend schools there and, particularly if they have jobs in the City, they may be reluctant to leave.” But she said that the outlook may be different for those “who may have been contemplating making their home [in London], and who may be more likely to consider other alternatives if they're prevented from claiming non-dom status in the U.K."
Raising the inheritance tax threshold
Background: In the U.K., when you die, your estate becomes liable for inheritance tax if it’s worth more than £325,000. Married couples are entitled to double the allowance, so they can pass on their assets tax-free up to £650,000. You pay 40% tax on the value of your U.K. and overseas assets above this sum. The Conservative budget will raise the threshold for inheritance tax from £325,000 to £500,000 per person, when a family’s “main residence” is involved in the estate and is passed on to direct descendants. It would fund this tax-break by reducing pension tax relief for people earning more than £150,000.
Potential savings: The Conservative plan will allow married couples to pass on their family home worth up to £1 million to their children tax-free, saving £140,000. What's more, this lift in the tax-free allowance will also benefit owners of homes worth between £1 million and £2 million—again saving them £140,000. It will start tapering off at £2 million so that those leaving more than £2.35 million will not benefit at all from the change.
Timeline: The change will come into effect on April 6th, 2017.
Potential market effect: Charlie Ellingworth of high-end property buyers Property Vision, is concerned that, when it comes to homes within the £1 million to £3 million price bracket, the proposal will encourage older people to remain in houses that are too big for them. “As fewer of these houses will come onto the market, it is likely that prices will rise, relatively.”