"Granted the amount of personal allowances, which landlords can now offset have reduced but despite this, investors should be very wary of dismissing property as a potential route for investment in the UK"
Whenever someone sells an investment, which is liable to Capital Gains Tax, then up until recently owners could exercise their personal allowance of £12,300 per owner before CGT was applied to any remaining profit. The profit is determined by the final sale price, less the price it was purchased for by that owner.
Certain related costs linked to the purchase and sale can also be utilised to reduce the liability further, along with any personal allowances. CGT is then applied to the net balance and the rate paid is determined by the related tax bandings of the owners i.e., 25% or 40%. Where someone is a 25% taxpayer then currently a CGT rate of 18% would apply and this would increase to 28% if they were a higher rate taxpayer.
From 1 April 2023, the personal allowance was reduced by almost 50% to £6,000, and again to £3,000 from next April, which means that landlords will have less profit that will be free of tax.
What can be done to prepare for this or better yet, avoid it?
Steven Bond, managing director of residential lettings, buy-to-let investments and surveying at property group Beresfords, provides advice in this regard where residential property investors are concerned.
Buying from scratch
For a number of reasons people looking to invest in a second property may be better placed to purchase as a limited company rather than private individuals.
1. Limited companies usually pay tax at lower rates on rental profits than individuals. Company property rental profits and residential property CGT are taxed at corporation rates currently 19%, which is significantly less than what a landlord would pay if they owned the property personally and were a higher rate taxpayer (28%).
2. Limited companies can still claim mortgage interest relief on any related loans, a benefit that was withdrawn from landlords owning investment properties in their own names.
3. There is no personal income tax liability on company rental profits, which are reinvested in mortgage capital repayments, property improvements or acquisitions. Income tax only applies to profits that are extracted for personal use.
4. There can also be some savings from an Inheritance Tax perspective, by setting up a family investment company.
What if I already own an investment property?
For existing landlords who have owned residential investment property, for some time in their own names, the situation is a little trickier.
They can sell the property to their limited company, but HMRC treats it as such and will apply CGT based on the current market values of those properties concerned, and not what they were originally purchased for by the individuals involved.
Also, stamp duty is applied at the enhanced rate because they are second properties and not a main residence. So, landlords considering this option must accept that they could face hefty costs upfront, but it may still prove financially sensible if the final tax bill as and when the property is re-sold at some point in the future is less, and the annual tax benefits up until that point also prove more beneficial.
Is buying a residential investment property still a sensible option?
Investing in property is not for everyone. However, the lucrative returns offered by ‘bricks & mortar’ over the medium to long term continue to perform very well against other forms of investment including fixed-rate bonds and ISAs.
Steven said: “In the geographical areas, that are covered by Beresfords, landlords continue to witness strong rental returns due to exceptionally high demand from tenants. Just like any other commodity the stronger the demand the greater the value there is in the product.
“Furthermore, property prices have increased considerably, which has provided lucrative levels of capital growth. Over the last ten years average selling prices locally have increased in varying degrees between, 63% and 95% respectively, depending on where a property is located and over a 20-year term the returns are even higher!
“Granted the amount of personal allowances, which landlords can now offset have reduced but despite this, investors should be very wary of dismissing property as a potential route for investment in the UK.
“Demand is likely to remain high for a considerable period as there are insufficient new homes being built. Not only does property perform well against other mainstream investment routes but it is also a very flexible asset in as much that the owner is in direct control so they can choose to retain it, borrow against, or dispose of it as and when they choose.
“It’s really important to remember that everyone’s personal circumstances differ, so the best approach is to gain specialist advice from the outset.”
