The coalition government’s announcement that Capital Gains Tax will be significantly increased has potentially huge implications for the buy-to-let market.
Investors who have previously bought property with the intention of selling it on later, or who wish to get rid of part of their portfolio, now face the prospect of their tax burden increasing (and profits reducing) by more than 100 per cent.
The government wants to see the rate of Capital Gains Tax increased so that it is similar to that at which income tax is charged. This means that buy-to-let investors will have to contend with CGT rates of as much as 40 or 50 per cent – a huge increase from the 18 per cent flat rate at which it is currently levied.
Option 1: Sell up now
If you intend to sell a property in the near future anyway, perhaps the most obvious option for avoiding the rise is simply to sell it now. It is unclear exactly when the rise will come into force, but it could be as soon as midnight on 22 June – so time is tight. Any gains realised before the rate goes up will still attract CGT at the current level of 18 per cent.
The effect of the impending rise has already been seen in property
markets, with many agents reporting sharp increases in the number of new
instructions to sell.
Of course, this is only a viable option if you want to sell now – and if you can find a buyer.
The short time scale involved may mean that you have to knock a significant chunk off your asking price in order to secure a sale.
Option 2: Use Principal Private Residence Relief
Your main residence is exempt from Capital Gains Tax, under rules known as the principle private residence (PPR) relief. Many landlords do not realise, however, that the PPR rules can be used to eliminate your CGT liability if you own more than one property.
A property is exempt during the period for which you are living in it, and for the final 36 months of your ownership. So, you could conceivably reduce your CGT bill on a second property by appointing it as your main residence for a period, selling it on, and then moving back into your old property. You would have to do this properly, though – bank accounts and electoral register details would have to be changed, for example.
There are rumours that the government intends to tighten up PPR rules in order to make this sort of manoeuvre more difficult. Make sure you take professional advice before proceeding.
Option 3: Transfer the asset
Some buy-to-let investors are considering setting up a limited company into which they would then transfer their portfolio. Income from sales or rent would then be subject to Corporation Tax, rather than CGT.
Tax professionals are giving conflicting advice on this. You should remember that you have to pay CGT when you dispose of an asset and there has been a capital appreciation – not just when you sell it. So, even if you give your property to the company for nothing, you would likely still have to pay 18 per cent on the difference in value if it has appreciated since you bought it. Given the potential difficulties associated with this course of action, it is probably only beneficial for larger portfolios.
You should also remember that everyone has an annual exempt amount for CGT purposes, currently set at £10,100. Furthermore, transfers of assets between spouses or civil partners do not attract CGT. Many investors are therefore considering transferring parts of their portfolios to their spouse or civil partner, in order to enjoy the benefits of both individuals’ allowances.
The Capital Gains Tax schedule is particularly complex, and it looks set to become even more difficult for property investors following the Emergency Budget. Regardless of the difficulties, though, if you intend to sell on property at some point in the future you should be considering ways in which you can mitigate your tax liabilities.
The details of the government’s new plans remain to be fleshed out. But
whatever the specifics, it seems certain that buy-to-let investors will
be getting a rawer deal after 22 June – or, at the latest, from the
start of the new tax year. Make sure that you seek professional advice
to help you deal with the changes as best you can.