In July 2020 the chancellor Rishi Sunak wrote to the office of tax simplification asking them to do a review on Capital Gains Tax (CGT). The consensus amongst property and tax experts is that CGT is likely to increase in 2021. This article will look specifically at the impact on any possible capital gains tax changes for property investors. It has been several years now that the conservative government have been targeting the property sector and continue to do so. In 2015 the then chancellor George Osbourne introduced clause 24, this basically meant that property investors were taxed on rental income rather than profits.
Possible reasons for this maybe that HMRC do not have an effective mechanism of debt taxation. This meant that many property investors were refinancing their properties, claiming interest relief on the refinance, and using the money in part to have a lavish lifestyle without paying any tax. Another reason, and probably more relevant to the governments eagle eye on the property sector, is they want to create more transparency and accountability thus discouraging the small property investor and encouraging corporations. As clause 24 does not apply to limited companies, many property investors with large portfolios have incorporated their businesses. Take a read of our article on possible solutions for Clause24.
CGT is charged on the profit/gain on sale of certain types of assets. A simple example would be you buy an asset for £100,000 and sell it after a few years for £150,000. Your gain/profit is £50,000, less any tax-free allowance, on which you would have to pay CGT. Silly as it may sound a great way to avoid paying CGT is not sell or transfer title of your assets. Importantly individuals pay CGT and Limited companies do not. Limited companies pay corporation tax on profits which is currently lower than the CGT rate paid by a higher rate taxpayer.
So, once the review of CGT is complete what is likely to change, but before we do that lets quickly look at what is unlikely to change. The current government is unlikely to impose rules that force companies to pay CGT as many large property companies would oppose such a measure. It would also go against the government wanting larger players to dominate the sector. Let’s not forget that large donors to the conservative party would be affected by any change to the corporate structure.
So, what seems likely to change, considering the smaller property investor is being attacked? As well as CGT rates increasing, we think changes to incorporation relief, S162 of TCGA 1992, maybe affected. This would avoid existing company taxation structures being changed and continues to make it harder for the smaller property investor by increasing their overall taxation burden.
So, when an individual wishes to convert their property business to a limited company structure they can use S162 incorporation relief to differ any CGT on transfer of title to the company. This is done by reducing the cost base of your shares in the company. The CGT is therefore paid when you sell the shares in your company. The following link gives further details and examples . CGT rates on the sale of shares is lower than on property assets.
So maybe there is a window of opportunity for property investors who haven’t yet incorporated their property business to do so now? What is right for you can only be determined by crunching the numbers. Certainly, incorporating a property business during Covid isn’t straight forward. If you are part way through the process you may find that lenders want to downgrade the valuations or even lower the loan to value. The reason for this is simple, they think the UK economy is going to tank which will led to a fall in property prices.
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