Budget 2016: Shock CGT cut could push property investors to set up companies
In a move to strengthen the incentive to invest, chancellor George Osborne has slashed capital gain tax (CGT) payable on gains from asset sales in the 2016 Budget.
The 18% rate currently paid by basic rate taxpayers will be reduced to 10% with effect from 6 April this year, while higher rate taxpayers will pay 20% instead of the current 28%.
It's a development likely to push investors further towards the realisation of capital gains, rather than taking income from their investments.
However, residential property investments are exempted; gains on the sale of second homes and buy-to-let properties will remain at the 18/28% level. People's main homes will remain unaffected by CGT.
Company structure option
Nimesh Shah, partner at London chartered accountant Blick Rothenberg, points out that the change in CGT could encourage investors in residential property to set up company structures for their investments.
“The chancellor announced that the 28% CGT rate would continue to apply for capital gains arising on the sale of residential property.
“However, a sale of shares in a company which owns a residential property (or portfolio of residential properties) would be assessed at 20% CGT,' he says.
The CGT reduction, coupled with the restriction to mortgage interest relief for individual buy-to-let investors and the reduction to corporation tax to 17% from 1 April 2020 just announced in the Budget, is likely to push investors in residential property towards company structures.
“This could quite easily lead to a future market amongst investors to trade shares in companies owning residential properties - which also have the benefit of attracting a lower rate of stamp duty,” Mr Shah adds.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.