Tax and property investment – what should I be thinking about?
Over the last 5 years or so we have seen a significant amount of tax changes impacting upon the property sector, specifically residential property investors. Changes such as an increase in Stamp Duty Land Tax (SDLT) costs on additional property purchases, the restriction of mortgage interest relief for higher or additional tax payers, the removal of wear and tear allowance for furnished properties not falling within the Furnishing Holiday Let rules and the application of the higher Capital Gains Tax (“CGT”) rates coupled with loss of Lettings Relief have meant that most landlords have seen a rise in tax costs over this time.
In July 2020 the first reduction in property taxes were announced through the removal of SDLT on the first £500,000 of consideration paid for residential property in England and Northern Ireland. This was designed to encourage the movement of the property market post lock-down. This 0% rate only applies to individuals who do not own another residential property interest or are replacing their home. For landlords expanding their portfolios there will still be an SDLT charge on the first £500,000 of consideration but this is limited to 3%, so still a saving to be made.
Later in the same month the Chancellor requested a review of CGT rates be undertaken and whilst we don’t know what the outcome of this review will be it is our expectation that we could see a rise in CGT rates, potentially announced in the Autumn Statement this year.
The outcome of both of these more recent announcements has meant we are seeing a lot more landlords wanting to understand what their options are. We have covered off below a few of the most popular questions.
Is now the time to incorporate our property portfolio?
This question has been explored a lot over the last few years following the introduction of the mortgage interest restrictions and therefore isn’t a new idea. Depending on the individual’s circumstances there are both CGT and SDLT relief available on incorporating a property portfolio which allows this to be done with no upfront tax cost. However, these reliefs are not available to everyone.
For those who couldn’t benefit from the reliefs, or who haven’t looked at the position before now, with the SDLT rates being lower until 31 March 2021 and the CGT rates potentially set to increase, now may be the time to review whether a company structure is appropriate to you. Whilst the properties are unlikely to be transferred to a company tax free the reduced costs may be more acceptable to you depending on what your long term objectives are.
Company structures can afford some more flexible tax planning opportunities in the longer term especially where you are looking to include other family members. However, there are also some potential additional costs to a company structure and therefore the position needs to be looked at in the round, on a case by case basis.
Should I be selling my portfolio?
This decision should not be driven by tax in isolation. Whether to sell your portfolio or not should also be considered against your financial needs and your longer term objectives.
To benefit from the current CGT rates then you may wish to look to sell some of your property portfolio to provide certainty as to your tax costs. With the introduction of the ‘SDLT holiday’ it may be easier to sell some of your portfolio as there could be higher demand.
Considering passing property to other family members may also be worthwhile considering now to benefit from the lower rates of CGT on the assumption they will increase in the future.
Should I be looking to expand my portfolio?
With the ‘SDLT holiday’ in place until 31 March 2021 there is arguably an opportunity here to consider expanding your property portfolio with a reduced cost attached. A decision will need to be made as to how the property is acquired – should you buy it personally or in a company for example. Each person’s circumstances are different and therefore we would recommend you get advice ahead of any property acquisitions to ensure you have understood you tax planning opportunities.
Whatever you decide to do it is important that you are aware of your tax costs before making a final decision. We would recommend you speak to your professional advisor to discuss your options.
If you would like to discuss the topics explored in this article, please contact Jo White.
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