Buy to let experts are reassuring landlords they will be largely unaffected by Budget changes to limited company taxation, despite reports to the contrary.
Late last week press reports suggested that changes to capital gains tax made in Philip Hammond’s Budget would harm landlords buying properties through limited companies. But mortgage experts say the financial impact should be limited – particularly as the basic rate of corporation tax is also due to fall.
In his Budget speech, the Chancellor announced that he was freezing the indexation allowance on gains made by companies from 1 January 2018. The Budget documents suggest that this will rake in some £1.8bn for the exchequer over the next five years.
At present, companies – including all incorporated landlords – can offset the profits they make against inflation. In other words, they are taxed only on gains made over and above the inflation rate for the period they’ve held the asset.
From January, this will no longer be the case. However, the rule will not be applied retrospectively, so incorporated landlords selling a property will be able to apply the indexation to gains made between the day the property was bought and 1 January 2018.
The indexation will not apply to gains made after this date, so over time this will have a more significant impact on landlords’ total tax bills. Those profits will be taxed at the main corporation tax rate, currently 19 per cent. It is due to fall to 17 per cent by 2020.
Those who own a second property outside a company structure are liable for capital gains tax on profits made when selling this asset. Homeowners will be able to use their CGT allowance (currently £11,300). Gains above this annual allowance are taxed at 28 per cent.
Property owners have not been able to apply indexation to these gains for a number of years. At 28 per cent, this rate of CGT is higher than the 20 per cent applied to other assets, such as equities. There is of course no CGT due on any profits made from the sale of an individual’s main residence.
In recent years there has been an increase in the number of people opting to buy property through a company structure. An advantage of owning property through a company is that owners can offset mortgage interest against their profits. This allowance is being gradually phased out from non-incorporated landlords between now and 2020.
Mortgages For Business chief executive David Whittaker said:
“This is an interesting and relevant change – but the impact for incorporated landlords should be fairly minimal.”
He points out that landlords generally do not choose to own a property through a company structure merely to gain this indexation.
“It’s unlikely to factor into their calculations. There are more significant reasons why they might choose to buy and own property this way. The removal of indexation is not going to change this. When you take the reductions to corporation tax into account, I’d say that overall it’s a neutral sum gain.
“Rather than complain about it I’d suggest that landlords would be better off trying to keep off the chancellor’s radar.”
23rd November 2017