Labour’s October Budget has already established itself as a point of contention. With a rumoured rise in Capital Gains Tax, here’s how landlords can prepare.
Article updated 23rd October:
Since the initial publication of this article, reports show that Rachel Reeves is now considering raising CGT on the sale of shares as opposed to buy to let properties.
This would raise the rate of tax on stocks and shares to 24% (the same as the current rate for property sales), raising a sum in the low “billions of pounds,” according to The Times.
Of course, the potential tax hike on stocks and shares risks damaging investor confidence, but for landlords and the PRS, it could be the reprieve we’re desperately after. A wave of new legislation already threatens to rock the boat – a further tax on property investment would only exacerbate the situation.
Labour’s Autumn Statement will take place on Wednesday 30th October. To get the latest news as it happens, sign up for our Investor Update.
Keep reading for the potential changes and how landlords can navigate CGT rises.
With the Autumn Statement looming and the rumour mill working overtime regarding the possible changes Labour could introduce, the number one concern our landlords are talking about is the anticipated changes to Capital Gains Tax (CGT).
Current CGT Rates
Currently, basic rate taxpayers pay 18% on the gain they make when selling a residential property, net of the £3,000 allowance. For higher and additional rate taxpayers, this rises to 24%. As a high-level example, if a higher-rate taxpayer buys a property for £100,000 and sells it for £200,000, then they would pay capital gains tax of £23,280.
How will Labour change CGT?
Labour may increase the rate of CGT, reduce it (which is highly unlikely), remove the allowance, or both.
The most expected outcome will be that CGT will increase and be charged at your highest rate of tax. As such, the CGT rate for higher rate payers would increase from 24% to 40% - a huge difference. In the above example, your CGT bill would increase from £23,280 to £38,800.
Worryingly, while one would be forgiven for thinking that this change would come into force in the next financial year (i.e. April 2025), George Osborne (back in 2010) announced a change in CGT, which came into force at midnight that day. This set a precedence for changing CGT, and it is probable that any CGT changes announced by Rachel Reeves will be pretty much instant.
The reality is that this change could be, at best, expensive but a considerable challenge for the sector at worst. For landlords who have been raising capital against their buy to lets over the years to help them grow their portfolio, they will now be left in a position with insufficient equity in their properties to cover their tax bill if they sell.
How Landlords Can Navigate the Potential Changes to CGT
For landlords looking for ways to navigate the potential hike in CGT, there are some options available to you. As with any property investment decision, please speak to a professional tax advisor first.
Sell to a Limited Company
Many landlords are already considering incorporating their property portfolios, and if this change to CGT comes in, it could be the tipping point. Limited Companies do not pay CGT but instead pay corporation tax on the sale of an investment property, which can be as low as 19% and as high as 25%. One downside of incorporation to consider would be the potential liability for CGT on the sale of the property to your Limited Company, as this can be an expensive process. On the other hand, it could allow you to have a more tax-efficient arrangement in the long-term. Please speak to a qualified tax adviser before making any property investment decisions.
Tenants in Common
For landlords with a ‘Tenants in Common’ arrangement, it could be worth checking the wording around the treatment of profit on sale. In the same way that your rent will be split in a defined way, you can also apportion the profits on sale, thus ensuring that if one of you is a basic rate taxpayer, you will be able to pay CGT on this rate. Again, it’s essential to speak to a professional tax adviser!
Your next steps
The main concern for property investors is timing. As mentioned above, any changes will likely take effect at midnight on 30 October, so you would need to get your ducks in order before then. Whilst this does not leave you a lot of time, it still leaves you a window of opportunity to put measures in place.
If you are considering the benefits of investing via a Limited Company, then why not have one of our brokers carry out a Property Portfolio Review for you?
Whilst we can’t give tax advice, we can take a look at your current mortgage rates and calculate how much you could save with today’s rate pricing.
Claim your FREE Portfolio Review here,
