Tax – budget essentials

The emergency budget was predicted to hit landlords hard. In reality it has been rather much kinder than expected.

The huge hike in Capital Gains Tax (CGT) to 40 or even 50 % didn’t materialise. Instead landlords on the basic rate of tax will continue to pay the current 18% rate of CGT on disposals. Higher rate tax payers will have to pay more. Their rate of CGT rises to 28%.

The other good and unexpected news is that those landlords with a holiday let will no longer lose their preferential tax breaks.
Even better for many landlords; the new Chancellor has set out his intentions to get borrowing down fast and as a consequence be able to keep interest rates low for longer. This should enable landlords to be able to generate the record rental profits that has made the ‘credit crunch’ and economic melt down just a little more bearable.

The only downside is likely to come for landlords that are letting high value properties to tenants on benefits. The drive by the Tories to drive down the benefits bill including capping the maximum rents that can be claimed by a landlord under the Local Housing Allowance will inevitably cause some landlords a few sleepless nights.
Steve Sims property tax expert and author of the best selling property tax guide “Paying less property tax” has outlined the key changes in the budget that impact directly on landlords:

Income Tax
Unchanged until April 6, 2011.

Capital Gains Tax (CGT)
The tax rate of 18% remain unchanged for taxpayers paying lower rate tax (20% or less)
From midnight June 22, 2010, higher rate taxpayers (40% plus) will pay 28% CGT on disposals – which include gifts or sales.
The annual exempt amount for CGT remains at £10,100 and is index linked for future tax years.

Corporation Tax
Companies are set to see a five year plan to gradually reduce the rate of corporation tax to 24%.
The small company tax rate will fall to 20% from April 2011.

Furnished holiday lets
Tax breaks for qualifying furnished holiday lets in the UK and European Economic Area are reinstated – this means owners can benefit from capital gains tax reliefs to reduce the rate paid – 10% entrepreneur’s relief on business asset disposals totalling up to £5 million in a lifetime instead of paying CGT at 18% or above – and reliefs to defer CGT – like roll over relief and hold over relief.

Capital allowances
These are of particular interest to commercial investors, furnished holiday let owners and house in multiple occupation (HMO) operators.
The key change is the reduction in the Annual Investment Allowance (AIA) to £25,000 from April 2012.
Any asset purchase or improvement attracting capital allowances that might exceed the AIA threshold should be phased in before APRIL 2012 to take advantage of the higher AIA threshold until that date.

Strategy

Higher rate taxpayers (40% plus)

This budget reintroduces the tax avoidance strategy of top-slicing for married couples and civil partners.
Tax savings are available with no gain/no loss transfers between married couples and civil partners if one partner is a lower rate taxpayer, effectively keeping CGT payable at 18%.
New investment property purchases via a limited company may also be advantageous for higher rate taxpayers who cannot set off a share of ownership to a lower rate taxpayer, as companies pay corporation tax on disposals rather than capital gains tax.

All corporation tax rates will fall below the higher rate of CGT from April 2011 and will become progressively lower over ensuing years until they reach maximum forecast lows of 20% for small companies and 24% for other companies.
Warning – transferring existing buy to let holdings in to a company is a strategy that may unravel due to resistance to investors claiming incorporation relief from HM Revenue and Customs.

What landlord should do now

Steve Sims advice to landlords is:
“Do nothing until you have completed a detailed property-by-property view of your portfolio to assess how the changes will affect your tax position – especially if you are a higher rate taxpayer selling or completing on a sale in the near future.”
He goes on to suggest that:
“Every property business needs to look at tax-effective ownership now and to put a policy in place for acquisitions and disposals.”
The emergency budget is a timely reminder to landlords that they should put their tax affairs in order at the start of their residential investment and not leave things to just before they retire.

Careful tax planning is definitely the name of the game.