Landlords review options following Chancellor’s announcement on Capital Gains Tax

The Chancellor’s recent announcement of a major overhaul of capital gains tax, together with the controversial buy-to-let tax changes over the last three years, is driving landlords to consider significant changes to their property portfolios.

Under the proposals, the maximum capital gains tax (CGT) rate of 28% could be raised closer to income tax rates, where the top rates are 40% and 45% in England and Wales.

Buy to let landlords who invested in rental property in 1990s and benefited from large profits are likely to be among the biggest losers from any rise in CGT.

A new report from The Mistoria Group, specialists in high-yielding property investment, reveals that 31% of landlords are now considering selling up, diversifying their portfolio or using a limited company to acquire and manage their properties.

Thousands of landlords have already left the market since the introduction of controversial buy to let tax changes three years ago.  There are 222,570 fewer landlords now than in 2017, a drop of 8%, which represents the lowest number at any point in the past seven years. (*Source: Estate agents, Hamptons International, 2020).

Since April 2020, landlords have been counting the cost of the most recent tax change – a reduction in buy to let tax relief – which is resulting in a sizeable loss of profits. The introduction of the new flat rate of 20% has resulted in landlords on higher incomes, losing much more in mortgage interest payments. Prior to the April 2020, landlords had been able to claim tax relief on their mortgage interest payments at their marginal rate of tax, so basic rate taxpayers would get 20% relief, but those at a higher rate would receive 40%, while top-rate taxpayers could claim 45%.

Recent figures 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 comments: “The game has changed for many buy to let landlords. For many years, owning rental property has been very profitable and has enabled investors to spread their risk and secure attractive yields and capital growth.

“Since 2017, landlords have been hit with a range of tax measures that have steadily eroded their profits.  Any rise in capital gains tax could be the tipping point, resulting in a rush to sell up before any changes are introduced.

“We know that many landlords are considering their options including using limited companies, which allows mortgage interest to be deducted from tax. In addition, capital gains on the sale of a property through a limited company will be only subject to small company tax rate of 19%, which is significantly lower than the top income tax rates of 40% and 45%.

“Large numbers of landlords are also looking to diversify their property portfolios with more profitable assets. For example, HMO investors have received a considerably higher return than standard BTL investors over the last five years – an average of 10-15%% in comparison to 5- 8%, applying a gross return to both. This is spite of the fact that the average initial capital investment in an HMO is higher than a standard BTL property.

“Our research shows that the average gross cash return before any charges and voids on HMOs, with student or young professional tenants over the last five years, have increased to 11-13%, compared with an average gross cash return of 6%-8% on a standard BTL across the UK.” These high returns are clearly evident in the North West of UK.”

The Mistoria Group has outlined some 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 houses of multiple occupation (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% on your gains (or 18% on residential property). You’ll pay 20% (or 28% on residential property) on any amount above the basic tax rate.
  • If you sold property in the UK on or after 6 April 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.

MCC Accountants are here to help SMEs in Manchester and Salford with their accounting needs. If you have any questions on capital gains tax or anything similar, please contact us or call us on 0161 707 1500 and we will do our best to assist you.



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