Budget 2016: Shock CGT cut could push property investors to set up companies

16 March 2016

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.

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