Landlords face higher capital gains tax bills when they sell
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