Why potential tax changes mean it’s time to consider limited company Buy to Let

Supporting the UK through lockdown has cost the government hundreds of billions of pounds. So, in the coming months and years, it’s likely that the Chancellor will have to make some tough taxation and spending decisions as he tries to plug the hole in the public purse.

One of the taxes Rishi Sunak is most likely to reform is Capital Gains Tax (CGT). This is paid when an individual disposes of an asset and makes a gain of more than £12,300 (in the 2020/21 tax year). Landlords who own rental property and who make significant gains can see part of their profits wiped out by this tax.

One way to mitigate the tax paid on Buy to Let gains is to consider using a limited company. Here’s why that approach could become more popular if reforms to CGT happen this year.

Chancellor could reform CGT (and increase tax rates) in 2020

The government are currently consulting on reforms to Capital Gains Tax, and changes could come into force as early as this autumn’s Budget.

Possible reforms that the Chancellor could make that may affect landlords include:

  • An increase in the rate of tax payable
  • An alignment of CGT and Income Tax rates, so 20%, 40% and 45% tax would be paid on gains. It’s worth noting here that people who pay CGT are twice as likely to be higher rate taxpayers than those that do not
  • Taxing capital gains at the same rate as dividend income. Currently, any annual dividend income from shareholdings above £2,000 is taxed at 7.5% (basic rate taxpayer), 32.5% (high rate taxpayer) or 38.1% (additional rate taxpayer).

Any increase in CGT rates would affect landlords who own properties in their own name, as potentially higher rates of tax would be paid on gains made when it comes to selling a property.

So, it’s perhaps no surprise that there has been renewed interest in holding Buy to Let property in a limited company.

Limited company Buy to Let could reduce the tax paid on a gain

As a company is a separate legal entity distinct from its owners, it pays Corporation Tax instead of Income Tax and Capital Gains Tax.

Gains are therefore taxed at 19%, compared to individuals who pay Capital Gains Tax on Buy to Let properties at 18% or 28% depending on their levels of income. Note that if you’re a basic rate taxpayer, the gain from a property sale could push you into a higher tax band.

Here’s an example based on a £150,000 gain on the sale of a Buy to Let property.

  • Limited company – Corporation Tax at 19% = £28,500
  • Individual – Capital Gains Tax at 28% (as the gain pushes you into a higher tax bracket) after annual allowance of £12,300 = £38,556

In this example, the company will pay a lower level of tax. And, with CGT set to be reformed and rates potentially rising even higher, landlords could make even greater savings by considering a limited company.

Get in touch

If you’d like more information on how limited company Buy to Let could work for you, please get in touch. Email enquiry@edinburghmortgageadvice.co.uk or call 0131 339 2281 to find out how we can help.

Please note

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Buy to Let (pure) and commercial mortgages are not regulated by the FCA.

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