Property and UK Tax (Part 5)
Over the past few weeks we’ve been thinking about how holding our properties in a limited company is probably the most tax efficient route following the changes to Section 24. However, there are some challenges with this and as I’ve mentioned previously, there really is no perfect solution.
One of the big problems with owning your properties within the corporate structure and with Corporation Tax is that you won’t get the equivalent of a Capital Gains Tax Relief when you sell. But it hasn’t always been this way, in fact this is only a very recent change that came into effect on 1st January 2018. Prior to this there was what was called Indexation, and here’s how it worked if you sold your asset within your limited company.
Let’s say you bought a property five years back; you’d be able to go into HMRC’s website and would be able to refer to a table to inflate the purchase price of your asset.
To give an example, if you’d bought a property for £50,000 and then sold it for £100,000 five years later, you’d be able to inflate the £50,000 purchase price by the multiplier in the table. This multiplier would take into account inflation and might have inflated the £50,000 up to say £75,000.
This meant that instead of paying Corporation Tax on the full £50,000 (in other words, the difference between the purchase price and the sale price), you’d only pay Corporation Tax on the difference between the inflated figure and the sale price. So, instead of paying tax on £50,000, you would only pay tax on £25,000. Indexation Relief was a bit like the corporate equivalent of Capital Gains Tax Allowance.
Sadly, this has been scrapped. So, this is how things are when we own our properties in a limited company.
Now let’s think about what happens when we own them in our own names and let’s think about the rates we might be paying if we were paying Capital Gains Tax. First of all, let’s consider the “allowance”. The Capital Gains Tax Allowance for 2017/18 was £11,300 and in 2018/2019, this will go up to £11,700. This is the amount that we can get tax free.
But what tax do we pay on the bit which isn’t tax free?
Unfortunately, the Government has been a little mean to property investors. They’ve brought in a double band of Capital Gains Tax for properties and a different band for other types of investments.
For example, if you’re a higher rate tax payer – and this is important because it’s not just one rate for everybody – then on your normal investments, i.e. stocks and shares etc., you would pay 20% on the chargeable gain. However, on property investments if you’re a higher rate tax payer then you’re going to pay 28% on the chargeable gain. Quite a considerable difference, isn’t it?
If you’re a lower rate tax payer, you pay slightly less. If it’s just a general investment that isn’t property, i.e. stocks and shares, then you would pay 10% on the chargeable gain. But, if it’s a property investment, you would pay 18% on the gain. Once again, a considerable difference!
Still, the received wisdom is that the best way forward today is to go into a limited company. Because while the situation isn’t ideal – especially with Indexation Relief now gone – with Corporation Tax at 19%, at least it’s just 19% and not 28% if you’re a higher rate tax payer.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
PS. In the video I mention that Corporation Tax is at 20% – apologies, it’s actually at 19% as explained above.
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