Incorporated Landlords to Pay More Tax

Incorporated Landlords to Pay More Tax

Hannah McCartan
26th January 2018

From this month, a loophole that allowed landlords who had incorporated their portfolios to avoid tax will be eliminated.

The discrepancy came in between how much tax an incorporated landlord would pay against an individual landlord.

Currently, individuals who own second or subsequent properties – for buy-to-let purposes or otherwise – pay 40 per cent capital gains tax (CGT) on the total the property appreciated when they come to sell it. Companies, on the other hand, have been allowed to deduct the amount of appreciation that was due to inflation – meaning they would pay less tax.

In Practice

The BBC gives this example of how incorporated landlords have benefited in the past:

If a flat was purchased for £100,000 for the purposes of letting out, and was 10 years later sold at £200,000, the individual who owned it would have to pay £40,000 CGT (40 per cent of the £100,000 profit).

However, if a company purchased the same property for £100,000 and inflation had been at three per cent for that 10-year period, inflation would have accounted for £34,000 of that price rise.

Then the company would only pay 40 per cent CGT on the rest of the rise – so it would be 40 per cent on the remaining £66,000 price rise. Therefore,  the CGT would be £26,400 rather than £40,000.

In the past 18 months. many landlords have incorporated their portfolios to avoid paying extra tax on the interest elements of their buy-to-let mortgages.

“Hidden in the small print”

The changes that come into effect in January 2018 will only apply to gains made on property from this date onwards.

Hannah McCartan, MD McCartan Lettings, Swansea, comments “This change, which was hidden in the small print of the Autumn Budget 2017, is a stark reminder to all Landlords in Swansea that it is essential to get and invest in professional financial advice when it comes to the UK property market.

Changes like this can cost landlords hundreds, sometimes thousands, of pounds in unforeseen tax bills and are not widely publicised.”

If you are considering investing in property in Swansea, give McCartan Lettings a call on 01792 430100 for a free market analysis. We can also give recommendations to professional services  such as accountants and mortgage advisors to help you along the way.

Sources: BBC / Letting Agent Today

Related: Should Swansea Landlords Incorporate their Property Portfolio? / Planning to Invest in Swansea?

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