The 2016 budget inaugurated some major changes to the capital gains tax, which could have some major implications for buy-to-let landlords – especially those with diversified investment portfolios, and other companies.
What are the changes?
Effectively, there has been a decrease in the capital gains tax on most "chargeable gains": The 18% rate became 10%, and the 28% rate became 20%. One exception, however, is those chargeable gains that accrue on residential properties that do not fall under the relief umbrella for private residences.
The former 28% rate was generally applied to higher-rate taxpayers, trustees and companies, whereas the 18% rate covered anyone not in those categories (generally lower rate tax payers).
The residential property exception under the new law is pretty stringent. Under the banner of "residential property", the measure includes any land that has had a dwelling on it at any point during the current ownership.
Why were they implemented?
The idea behind these policy changes is to promote business growth and investment activity. The general wisdom is that low capital gains rates mean companies are freed up to do what they need to; essentially, to expand their capacities and create jobs. The idea behind the exception with regard to residential property is to encourage investment in companies, rather than properties. The new rates will be affecting all relevant gains realised since 6 April 2016.
What will the impact on the economy be?
The changes will significantly decrease the amount flowing into the Exchequer coffers, to the tune of £600-700 million per year over the next five years, according to the Office for Budget Responsibility. On the other hand, it will significantly bolster company coffers, giving businesses the capital they require to grow and open up new jobs.
It will also have a major effect on those individuals and families with significant capital holdings, and those who make multiple investment transactions throughout the year. With new lower capital gains tax liability, they will now have more room to play with when it comes to managing and growing their investments.
Of course, things will not change quite so much for those holding residential properties, unless of course they opt to switch some of their investments from properties to enterprises. However, the changes are designed so that they do not disproportionately affect any particular income group.
The government holds, in addition, that there will be no negative impact on businesses or other organisations, as the changes are aimed primarily at individuals with capital gains tax liabilities, personally or professionally.
What should I do if I am an unincorporated buy-to-let landlord?
This is the question many people are asking, and unfortunately there’s not a perfectly clear answer.
One possible option is to incorporate, which also allows you to avoid private income tax rates, and take advantage of corporation profits taxes, which decreased in April 2017. However, there are of course other costs to consider involved in running a business, including administrative costs and those related to renegotiating mortgages.