Buy-to-let experts are reassuring landlords they will be largely unaffected by Budget changes to limited company taxation, despite reports to the contrary.
Earlier today press reports emerged that changes to capital gains tax made in the Budget yesterday would harm landlords buying properties through limited companies.
But mortgage experts say the financial impact should be fairly limited – particularly as the main 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 – which will include all incorporated landlords – can offset the profits they make against inflation. In other words, they are only taxed on gains made over and above the relevant inflation rate for the period they’ve held this asset.
From January, this will no longer be the case. However, this rule will not be applied retrospectively, so incorporated landlords selling a property will be able to apply this indexation to gains made between the day the property was bought and 1 January 2018.
This indexation will not apply to gains made after this date, so over time this will have a more significant impact on landlords’ overall tax bills.
These profits at taxed at the main corporation tax rate, which is currently 19 per cent. It is due to fall to 17 per cent by 2020.
Those who own second property outside of 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 rate 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 who have chosen to buy property through a company structure. One of the advantage of owning property through a company structure 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 says: “This is an interesting and relevant change – but the impact for incorporated landlords should be fairly minimal.”
He points out that landlords do not chose to own a property through a company structure just to gain this indexation. “It’s unlikely to really factor into their calculations. There are more significant reasons why they might choose to buy and own property this way. The removal of this 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.”
Blick Rothenberg’s senior manager Genevieve Moore adds: “The 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, business should be prepared for an eventual abolition of the relief in the future, and plan accordingly.”