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Buy-to-let investors face higher taxes on capital gains

Buy-to-let investors who have set up as companies will face increased taxes when they eventually sell their properties.

Today’s Budget included changes to the way gains are calculated which will results in higher tax bill, although the effects are unlikely to be felt for some years.

The key change is that “indexation” – a tax relief which allows gains to be reduced depending on the duration of ownership – will be frozen from January 2018.

Gains by businesses, including incorporated landlords, are taxed at the general rate of corporation tax.

Corporation tax is 19pc, falling to 17pc by 2020. But the inability to offset the effects of inflation after January 2018 is expected to cost business owners £1.8bn over the next five years.

Genevieve Moore, of accountants Blick Rothenberg, said: “The proposed freezing of indexation allowance for companies is not unexpected and will have most impact on companies that own properties which they have owned for many years.

“Although this is a proposal for freezing indexation allowance, businesses should be prepared for an eventual abolition of the relief in the future and plan accordingly.”

Thousands of buy-to-let investors have moved their properties into a company structure in recent years, in a bid to avoid the Government’s crackdown on tax reliefs for buy-to-let investors who own properties directly.

From April this year buy-to-let investors who own their properties directly start to lose the ability to offset mortgage interest from their profits before calculating their tax liability.

The reduction in relief is being phased in between now and 2020 and will be replaced by a 20pc tax credit.

From this year landlords can offset only 75pc of their mortgage interest against their profits. This falls to 50pc next year, 25pc in 2019 and zero in 2020.

Buy-to-let investors who own their properties outside a company were given a small reprieve elsewhere in the Budget.

Plans to make investors pay capital gains tax within 30 days of selling a property were deferred until April 2020. Currently buy-to-let investors have until their next tax return to pay the tax due but this was due to change from April 2019.

How much more capital gains tax will buy-to-let investors pay?

Assume a landlord bought a property within a company in March 2001 for £120,000, and sold it in October 2017 for £200,000. The gain is £80,000.

Under the current system of indexation relief you apply an “indexation allowance”  depending on your period of ownership. This figure is supplied by HMRC and for the period concerned – March 2001 to October 2017 – is 0.599. You multiply this factor by the price you originally paid. So, £120,000 x 0.599 =£71,880.

You then take away your indexation from the profit, leaving you with £8,120. The indexed gain of £8,120 is then subject to corporation tax at 19pc, totalling £1,542.80.

By contrast, after indexation allowance is scrapped, if the property in the example above were purchased on 15 Jan 2018 for £120,000 and sold in May 2020 for £200,000 the gain would be £80,000.

No indexation would be available and the total gain considered would be the £80,000.  This means the tax, at the now reduced 17pc rate, would be due on the full £80,000, totalling £13,600.

Blog Post from The Telegraph

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