There is currently a renewed focus on the property market, especially residential property as the pandemic coupled with the Stamp Duty Land Tax (SDLT) holiday has seen activity in the market increase. In addition, attention has started to turn to what tax changes might be seen in the future to help balance the government’s books following the increased spending to support the economy.
While possible Income Tax rises will affect the yield on investments for rental businesses, it has been widely discussed that we may well see increases to Capital Gains Tax (CGT) when the time comes for the Chancellor to recoup some of the recent outlays.
The current rates of CGT are:
Basic rate taxpayer | Higher rate taxpayer | ||
Commercial property | 10% | 20% | |
Residential property | 18% | 28% |
If for example the rates are changed so that gains are taxed at a taxpayer’s marginal rate of Income Tax, this could see an increase of up to 25% in the rate of tax payable on these gains for an additional rate taxpayer.
This combined with general market uncertainty and speculation that reliefs such as private residence relief might be reviewed could mean that now is a good time for property owners to review the efficiency and structure of their property interests.
Typically property investors holding their assets directly consider two options for restructuring; Trusts or companies. This largely depends on what they are trying to achieve. For many Income Tax savings and loan interest relief are fundamental, whereas for others Inheritance Tax (IHT) and estate planning are at the forefront of their minds.
The current SDLT holiday, which reduces the amount of SDLT payable for properties under £500,000 to 0% or 3% and the potential for an increase in CGT rates means that there is a currently a window of opportunity to consider this planning with a cheaper tax cost.
ExampleMr Henderson is an additional taxpayer who owns a £500,000 rental property, with £375,000 of attached debt. The property was acquired in 2016 for £450,000. The property produces rental income after expenses (excluding loan interest) of £30,000. Loan interest is £15,000 per year. It is assumed below that regardless of structure that Mr Henderson will retain all post tax profits to pay down the current level of borrowing. Income Capital Gains Tax Stamp Duty Land Tax Summary
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