Land­lords face higher cap­i­tal gains tax bills when they sell

The Daily Telegraph - Your Money - - FRONT PAGE - Amelia Mur­ray Sam Mead­ows

The Chan­cel­lor is freez­ing a valu­able al­lowance for in­vestors who own prop­erty via a com­pany. Laura Suter ex­plains

Buy-to-let in­vestors who have set up as com­pa­nies will face in­creased taxes when they even­tu­ally sell their prop­er­ties. The Bud­get in­cluded changes to the way gains are cal­cu­lated which will re­sult in higher tax bills, al­though the ef­fects are un­likely to be felt for some years.

The key change is that “in­dex­a­tion” – a tax re­lief that al­lows gains to be re­duced de­pend­ing on the du­ra­tion of ownership – will be frozen from Jan­uary 2018.

Gains by busi­nesses, in­clud­ing in­cor­po­rated land­lords, are taxed at the gen­eral rate of cor­po­ra­tion tax. Cor­po­ra­tion tax is 19pc, fall­ing to 17pc by 2020. But the in­abil­ity to offset the ef­fects of in­fla­tion after Jan­uary 2018 is ex­pected to cost business own­ers £1.8bn over the next five years.

Genevieve Moore, of ac­coun­tants Blick Rothen­berg, said: “The pro­posed freez­ing of the in­dex­a­tion al­lowance e for com­pa­nies is not un­ex­pected ed and will have most im­pact on n com­pa­nies that have owned prop­er­ties rop­er­ties for many years.

“Al­though ugh this is a pro­posal for freez­ing ng in­dex­a­tion al­lowance, e, busi­nesses should be pre­pared for an even­tual abo­li­tion of the re­lief in the fu­ture and plan ac­cord­ingly.”

Thou­sands of buy-to-let in­vestors have moved their prop­er­ties into a com­pany struc­ture in re­cent years, in an ef­fort to avoid the Gov­ern­ment’s crack­down on tax re­liefs for buy-to-let in­vestors who own prop­er­ties di­rectly.

In April land­lords who own their prop­er­ties di­rectly started to lose the abil­ity to offset mort­gage in­ter­est from their prof­its be­fore cal­cu­lat­ing their tax li­a­bil­ity. The re­duc­tion in re­lief is be­ing phased in be­tween now and 2020 and will be re­placed by a 20pc tax credit. From this year land­lords can offset only 75pc of thei their mort­gage in­ter­est agains against their prof­its. This falls to 5 50pc next year, 25pc in 2019 and zero in 2020. Paul Roth Roth­well, 34, is one land­lord who wh has bought prop­er­ties w within a com­pany. He has bui built up a £33m prop­erty for­tune fo after start­ing with just £15,00 £15,000 13 years ago. His co com­pany, Em­pire Prop Prop­erty Con­cepts, base based in Don­caster, now em­ploys 12 staff. As­sume a land­lord bought a prop­erty within a com­pany in March 2001 for £120,000 and sold it in Oc­to­ber 2017 for £200,000. The gain is £80,000.

Under the cur­rent sys­tem you ap­ply an “in­dex­a­tion al­lowance” de­pend­ing on your pe­riod of ownership. This fig­ure is sup­plied by HMRC and for the pe­riod con­cerned – March 2001 to Oc­to­ber 2017 – is 0.599. You mul­ti­ply this num­ber by the price you orig­i­nally paid: £120,000 x 0.599 = £71,880.

You then take this from the profit, leav­ing you with £8,120. The in­dexed gain of £8,120 is sub­ject to cor­po­ra­tion tax at 19pc, to­talling £1,543.

Once in­dex­a­tion is scrapped, if the prop­erty in the ex­am­ple above were pur­chased on Jan 15 2018 for £120,000 and sold in May 2020 for £200,000, the gain would be £80,000.

No in­dex­a­tion al­lowance would be avail­able and the to­tal gain would be the £80,000. This means the tax, at the re­duced 17pc rate, would be due on the full £80,000, to­talling £13,600. Bud­get gives savers lit­tle to cheer about

Re­tired cou­ple Michael and Chris­tine Nalden, above, had hoped Philip Ham­mond, the Chan­cel­lor, would ad­dress the dis­ap­point­ing cash sav­ings rates cur­rently on of­fer in the Bud­get.

“We don’t have Isas be­cause the rates are no good,” said Mr Nalden, 71.

“We have Pre­mium Bonds but we want bet­ter re­turns on our cash.”

But this wasn’t a Bud­get for savers. The an­nual Isa

al­lowance, which in­creased from £15,240 to £20,000 in 2017, will not change in the next year.

The amount that can be saved for chil­dren in a Ju­nior Isa will in­crease in line with in­fla­tion, from £4,128 to £4,260 in 2018-19.

In last year’s Au­tumn State­ment, savers learnt of a new three-year bond from Na­tional Sav­ings & In­vest­ments that promised to pay mar­ket-lead­ing in­ter­est of 2.2pc.

At the time the top three-year bond from Ikano Bank of­fered just 1.63pc.

But when the NS&I bond even­tu­ally launched in April it matched the top rate, paid by mo­bile-provider Atom Bank’s three-year ac­count.

Atom Bank also al­lows cus­tomers to save up to £100,000 in the ac­count, al­though only £85,000 of this will be pro­tected by the Fi­nan­cial Ser­vices Com­pen­sa­tion Scheme. In con­trast, the NS&I bond only per­mit­ted cus­tomers to save £3,000.

In April 2016 the “per­sonal sav­ings al­lowance” was an­nounced, mak­ing Isas less at­trac­tive.

Ba­sic-rate tax­pay­ers can earn £1,000 sav­ings in­come be­fore pay­ing tax. Higher-rate tax­pay­ers have an al­lowance of £500. Ad­di­tion­al­rate tax­pay­ers get no al­lowance.

Divorc­ing cou­ples who faced pay­ing the stamp duty sur­charge will be given a re­prieve in a move that re­verses one of the un­in­tended con­se­quences of pre­vi­ous leg­is­la­tion.

Ge­orge Os­borne, the for­mer chan­cel­lor, in­tro­duced higher rates of stamp duty in an attack on the buy-to-let mar­ket. He im­posed a 3 per­cent­age point sur­charge on those buy­ing prop­er­ties in ad­di­tion to their main home.

While the pol­icy was aimed at land­lords, it has had a range of un­in­tended con­se­quences since its im­ple­men­ta­tion in April 2016.

Spouses go­ing through a divorce found them­selves sub­ject to the sur­charge in cer­tain cir­cum­stances. If a court or­dered one spouse to al­low their part­ner to con­tinue living in the jointly owned fam­ily home, for ex­am­ple, that part­ner would be hit by the ad­di­tional rate if they bought a new prop­erty. This was seen as un­fair.

The sur­charge can sig­nif­i­cantly in­flate the bill. A trans­ac­tion worth £500,000 would or­di­nar­ily at­tract stamp duty of £15,000, but with the sur­charge the bill would be £30,000.

In the Bud­get Philip Ham­mond moved to end this anom­aly. The Bud­get word­ing sug­gests that a court or­der may be re­quired in or­der for the ex­emp­tion to ap­ply and that in­for­mal ar­range­ments be­tween split­ting cou­ples may not be enough.

Car­o­line Le Je­une, a tax part­ner at Blick Rothen­berg, the ac­coun­tancy firm, said: “This is a re­dress­ing of the prob­lems in pre­vi­ous, hastily in­tro­duced leg­is­la­tion. They should have taken the time to get it right the first time. Over­all this will be ben­e­fi­cial for peo­ple in this sit­u­a­tion.”

The Gov­ern­ment will also close a loop­hole, un­cov­ered by Tele­graph Money ear­lier this year, which en­abled buy­ers to give a small por­tion of their prop­erty to their spouse and avoid the sur­charge.

This was be­cause the buyer could ar­gue that they had dis­posed of a “ma­jor in­ter­est” in their main res­i­dence, us­ing the le­gal def­i­ni­tion. Some ex­perts said this meant they would not have to pay the ad­di­tional rate on the new pur­chase.

Gov­ern­ment pa­pers now say buy­ers must dis­pose of their en­tire prop­erty to avoid be­ing li­able for the sur­charge.

‘Land­lords should be pre­pared for an even­tual abo­li­tion of this re­lief’

Land­lord Paul Roth­well owns some prop­er­ties per­ties through a com­pany

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