In our last blog we covered how the 2021 local property market will behave and how many property owners have good reason to be positive about the upcoming year. In this article we wanted to cover the new Capital Gains Tax that government is proposing and what it will mean for the everyday Leicester Landlord and property investor. Now be honest, does the mere mention of the Capital Gains Tax trigger your fight or flight response? Sweating much?
If so, fear not as with most things in life you need to check the small print, and that’s why we think all is not lost, in fact there’s everything to gain.
So why are we all surrounded with such a gloomy atmosphere when it comes to all things related to the property market and the dreaded Capital Gains Tax? Well, the story starts with debt. Not just what government borrowed in the last financial year, but what’s required to fight the COVID pandemic. In total it amounts to an eye watering half a trillion pounds. One way the Office of Tax Simplification suggested we digest this huge mothball is through an increase in Capital Gains Tax, synchronising it to the individual’s own tax rate. Simply put if you’re a higher earner you’re now a higher ower.
Higher rate tax payers will now pay 40% in CGT compared to the previous 28% when selling a buy to let property. For additional tax rate payers it’s 45% and the sting in the tail is a possible cut to the current £12,300 CGT allowance.
If you feel like that’s an insult to an eye watering kick between the legs you’re not alone. But, before you reach for the pitchfork and join the growing landlord revolt, pause the movie right there as act two brings a twist!
In order to counteract thousands of Landlords and property investors from up and down the country pulling the plug, the Office of Tax Simplification have proposed two things, rebasing and indexation. This means any property purchased before 2000 wouldn’t have any taxation applied to gains made before that time (that’s the rebasing bit) with all Capital Gains calibrated for inflation.
Confused? OK let’s look at an example:
Let’s say you bought a property pre-2000 and it’s value was the average value of a property of that time, that being £77,500. Fast forward 21 years and the property has more than trebled in value, now sitting at £246,700. This then serves you a juicy chicken leg of profit to the tune of £169,200. Now, let’s say you’re classed as a high earner with an anual wage of £60,000 (or higher) per year. After the annual allowance you’re afforded, your CGT bill would be a whopping £43,932.
Let’s also say the CGT rate is the same at 40% with the lower annual allowance of £5k….under the new proposals the same Landlord would only pay £34,906 and make a tidy profit in excess of £9k! Then factor in all property purchases before 2000 are free of Capital Gains Tax and the whole picture starts to look a lot brighter!
It is worth remember that the Office of Tax Simplification is only there to report to government on issues relating to simplifying tax. It has no real power to set taxation policy and no doubt many of you will find it tempting to pull the plug and try and cash in whilst you can. However CGT is only applied when you either transfer investments or sell property and on rental income that many landlords use to supplement their full or part time jobs.
So the forecast for Capital Gains Tax is actually a good one, and would merit investors staying put with their families inheritance safely secured.
Additionally it’s also worth remembering there’s not a huge suite of options open for investments outside of property. Stock markets are unpredictable, the best building societies are only able to offer 0.8% pa and government bonds are only paying out a miserly 0.324% pa. Unless you’re on to a sure thing with we’d advise sticking to property. Property is tangible, easily understood and people will always need a place to live. Making decisions on what could happen is never advisable and often turns out to be an impulsive move based on media and naysaying. So, If you’re thinking of taking our advise why not start 2021 with building your property portfolio.
Seriously, what have you got to loose? We run a free consultation service and amongst our entire team we’ve got around 60 years of combined knowledge. Not a bad excuse to drop in for a coffee in the new year!
Other than that….well there’s always Bitcoin!
