How can landlords prepare for Labour’s tax reforms?

How can landlords prepare for Labour’s tax reforms?

Written by Jeni Browne, MFB

Labour’s Budget has already established itself as a point of contention. With a rumoured rise in Capital Gains Tax, here’s how landlords can prepare.

With the Autumn Statement looming and the rumour mill working overtime regarding the possible changes Labour could introduce, the number one concern our landlords are talking about is the anticipated changes to Capital Gains Tax (CGT). 

Current CGT Rates

Currently, basic rate taxpayers pay 18% on the gain they make when selling a residential property (that isn’t their main residence), net of the £3,000 allowance. For higher and additional rate taxpayers, this rises to 24%. As a high-level example, if a higher-rate taxpayer buys a property for £100,000 and sells it for £200,000, then they would pay capital gains tax of £23,280.

How will Labour change CGT?

Many experts predict Labour will increase the current rate of CGT so it is charged at your highest rate of tax. The CGT rate for higher rate payers could increase from 24% to 40% - a huge difference. Based on the example given above, the CGT bill would increase from £23,280 to £38,800. 

What’s even more concerning for landlords is how soon we could see this CGT rise come into force. Back in 2010, George Osborne set a precedent for changing CGT, implementing his announcements at midnight the very same day. It’s highly likely that any CGT changes announced by Rachel Reeves will be pretty much instant.

The reality is that this change could be, at best, expensive but a considerable challenge for the sector at worst. For landlords who have been raising capital against their buy to lets over the years to help them grow their portfolio, will now be left in a position with insufficient equity in their properties to cover their tax bill if they sell.

How Landlords Can Navigate the Potential Changes to CGT

For landlords looking for ways to navigate the potential hike in CGT, there are some options available to you. As with any property investment decision, please speak to a professional tax advisor first.

1. Sell to a Limited Company

Many landlords are already considering incorporating their property portfolios, and if the expected changes to CGT come in, it could be the tipping point. Limited Companies do not pay CGT but instead pay corporation tax on the sale of an investment property, which can be as low as 19% and as high as 25%. One downside of incorporation to consider would be the potential liability for CGT on the sale of the property to your Limited Company, as this can be an expensive process. On the other hand, it could allow you to have a more tax-efficient arrangement in the long-term. Please speak to a qualified tax adviser before making any property investment decisions.

2. Tenants in Common

For landlords with a ‘Tenants in Common’ arrangement, it could be worth checking the wording around the treatment of profit on sale. In the same way that your rent will be split in a defined way, you can also apportion the profits on sale, thus ensuring that if one of you is a basic rate taxpayer, you will be able to pay CGT on this rate. Again, it’s essential to speak to a professional tax adviser!

What to do next

The main concern for property investors is timing. Any changes will likely take effect at midnight on 30 October, so you would need to prepare before then. Whilst this does not leave you much time, it still leaves you a window of opportunity to put some measures in place.

If you have any questions or would like to speak to a member of the MFB team, you can contact them by submitting an enquiry here.

You can read the original article from MFB and other useful guides on their website here.