Chancellor's tax crackdown could cost landlords £7,000

Marianna Hunt
·3-min read
Chancellor Rishi Sunak
Chancellor Rishi Sunak

Landlords are running out of options for keeping their buy-to-let businesses in profit, as the Government plans a tax crackdown that could cost them almost £7,000 each.

Chancellor Rishi Sunak is considering increasing the rates of capital gains tax, which is charged when an investment property is sold, to bring them in line with income tax.

Landlords face a double whammy as Mr Sunak is also looking to increase corporation tax from 19pc to as much as 24pc. This will affect buy-to-let owners who have chosen to incorporate their properties.

A record number of landlords did so last year after previous tax crackdowns since 2016 made it increasingly unprofitable to own a buy-to-let in their personal name. About 229,000 buy-to-let businesses are now run using a company, according to Hamptons International, the estate agency.

The proposed capital gains hike would cost the average landlord an extra £6,800 in tax when selling up, calculations by Hamptons have revealed. London landlords, who have typically seen the biggest gains, will see their tax bill rise the most – by £26,840.

Higher-rate taxpayers would be hit by a 40pc capital gains tax rather than the current 28pc on their gains. The analysis assumes landlords have not already used up their £12,300 annual tax-free allowance.

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Buy-to-let owners who have moved their property into a company structure would see their corporation tax bill jump by a quarter if the increase to this levy is implemented, Hamptons added.

The average limited company landlord who owns one buy-to-let worth £190,000 will see their annual tax bill rise from £968 to £1,223. This is based on the assumption they have a 75pc interest-only mortgage and are earning a typical £11,210 per year in rent.

Their annual net profit will fall from £4,129 to £3,874 – although this is still more than the average profit of £3,203 made by a higher-rate taxpayer who owns their buy-to-let in their personal name.

They will also pay more when they come to sell their property. Landlords who own their properties via a limited company pay corporation tax, rather than CGT, when they sell them.

Aneisha Beveridge of Hamptons said: “The proposals mean that the advantage for higher-rate tax paying landlords of incorporating their buy-to-let will become more marginal. Most landlords will still benefit from incorporating, but they’ll have to do their homework on the additional costs associated with setting up and owning a limited company portfolio.”

New evidence suggests buy-to-let owners have been rushing to sell their properties before these tax changes come into effect. The percentage of homes for sale that were previously rented out has risen across all English regions in the past few months, according to property website Zoopla. Currently 7.2pc of all new stock in Britain is a former rental property.

Changes to corporation tax will also hurt small business owners. Calculations by Saffery Champness, the accountant, show that the average small business will pay an extra £400 a year in tax following the change. This is based on the average profit for a small- to medium-sized enterprise (£8,000 per annum).

A business making a profit of £100,000 a year will pay an extra £5,000 a year.

The firm's Mike Hodges said: “Owner managed businesses usually pay themselves a dividend from post-corporation tax profits and dividends were recently hit with an additional 7pc tax liability so many owners will see this as another attack on their income and the SME sector.”

Have you sold your buy-to-let property in advance of a potential increase to capital gains tax? Tell us in the comments section below

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