Investment tips for landlords threatened by Capital Gains Tax hike

A property investment firm has given tips to landlords who may feel m threatened by the prospect of a hike in Capital Gain Tax.

A report commissioned by Chancellor Rishi Sunak, which appeared early this week, suggests the maximum CGT rate of 28 per cent be raised closer to income tax, where the top rates are 40 per cent and 45 per cent in England and Wales.

Buy to let landlords are likely to be among the biggest losers from any rise in CGT.

Now a study by investment consultancy The Mistoria Group claims 31 per cent of landlords are considering selling up, diversifying their portfolio or using a limited company to acquire and manage properties - trends accelerated by worries over CGT.

Thousands of landlords have already quit since the introduction of controversial buy to let tax changes three years ago.  

Mistoria - citing figures from estate agency Hamptons International - says there are 222,570 fewer landlords now than in 2017, a drop of eight per cent and the lowest fall in the past seven years. 

Recent data from The Nationwide Building Society reveal how a typical landlord’s profits have reduced significantly. For example, a landlord with a £150,000 buy to let mortgage on a property worth £200,000, with a monthly rent of £800, would instead of making a net profit of around £2,160 a year is only making £960.

Mish Liyanage, managing director of The Mistoria Group, says: “Since 2017, landlords have been hit with a range of tax measures that have steadily eroded their profits. Any rise in CGT could be the tipping point, resulting in a rush to sell up before any changes are introduced.

“We know that many landlords are considering options including using limited companies, which allows mortgage interest to be deducted from tax. 

“In addition, CGT on the sale of a property through a limited company will be only subject to small company tax rate of 19 per cent, significantly lower than the top income tax rates of 40 and 45 per cent.”

Liyanage offers these tips on how landlords can protect their profits:

- Buying property through a limited company provides landlords with higher levels of tax relief and personal tax savings. There is no income tax on the retained profit, thus allowing more cash to re-invest. Although corporation tax is payable on trading profits, this is lower than the higher income tax rate;

- Landlords could switch to shorter-term fixed rate deals to get lower rates of interest, although these mortgages may carry higher arrangement fees and early repayment charges;

- Diversifying a property portfolio, to feature a mix of traditional buy to let, off-plan new builds, student rentals or HMOs will spread a landlord’s risk. If something goes wrong with one property, a landlord will have another to fall back on. Landlords can also achieve top rental yields in places like Liverpool and Manchester, so it’s worth looking at regions where you will achieve the best returns;

- Try to sell your properties before April 2021. This will allow you to still claim £12,300 tax-free allowance. If the capital gain is within the basic Income Tax band, you’ll pay 10 per cent on your gains (or 18 per cent on residential property). You’ll pay 20 per cent (or 28 per cent on residential property) on any amount above the basic tax rate;

- If you sold property in the UK on or after April6  2020 you must now report and pay any tax due on UK residential property using a Capital Gains Tax on UK property account - within 30 days of selling it. You may have to pay interest and a penalty if you do not report gains on UK property within 30 days of selling it.

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