Capital Gains Tax Changes in 2021

They've talked about maybe changing the corporation tax, that's the tax you pay when you have a business; it's the tax you pay on your profits. They've talked about maybe changing income tax and maybe changing capital gains tax. Now any government is going to need to cover this, if it was the other parties they'd have to do the same thing. But the Conservative Party are normally supposed to be all for businesses and free enterprises. They want to stimulate the economy by getting entrepreneurs to create businesses and create jobs thus stimulating the economy. That's what the Conservative Party has always been about.

Now unfortunately it looks like many of the policies that the Conservative Party is bringing in are not really supporting the entrepreneurs and business owners of this country. That's a real shame, because I think that's one of the ways the UK could get out of the recession; by helping entrepreneurs to be creative, create businesses and jobs, but they're not exactly being incentivized to do that. I think property investors are often seen as a target. “How could we tax people who are seen as making money and maybe not very popular in society?” A lot of tenants don't like the fact that landlords have got all this property and make all this money. They fail to see the point that we as property investors are providing much needed accommodation, hopefully good quality accommodation at affordable rates, for people who cannot afford to buy their own property. If there were no private landlords in this country, the country would be in a real problem because there would not be enough rental accommodation. Rent would actually be much, much higher than it is right now. But the government needs to get money in.

There's been a report, and it's a proposal at the moment but it's made massive headlines recently, that capital gains tax could potentially double for investors. What I want to do is look at what exactly the tax are situations right now. How are you affected? Whether you own property in your own name or in a company structure, let's look at it right now and understand that, and then we can see what the impacts might be in the future. There's no point in worrying about things that aren't in place now. Very often governments talk about things but they don't actually put them into practice. They only talk about things as rumours and I think that there's a lot of hype in the media and the press that get people worked up. You have to be very careful not to get taken down by negativity in the media.

What that means is that when you look at how much a mortgage is and how much actual cash you're going to get, if you've owned a property for a very long time and you've had really good growth, it might be that when you sell the property, the difference between the mortgage and the value will give you a certain amount of money. If you've had really good growth, it might be that that money might not be enough to pay all of the tax. So for some people, if they had really good growth, it’s not worth ever selling that property, they just need to hold onto that forever. Now here's the interesting thing. If you never sell a property, you never have to pay capital gains tax on it. The reason is because rather than paying capital gains tax, when you die, you pay inheritance tax, IHT. At the moment as I write this, IHT is at 40%. That's higher than capital gains tax. So when you die, you get taxed at 40% rather than capital gains tax. But if capital gains tax does increase in value, it might get close to that 40% level for higher rates tax payers. So again, that's something to look for in the future.

But the point is if you own property in your own name, if it's your residence where you live, if it goes up in value then you can sell it after a gain and there's no tax to pay. That's at the moment, but you know what? The government might change that and they might start taxing you on growth on your own home. That would be a real shame because that's how people move up the ladder to bigger and bigger houses. They have some growth on their property, they sell the property and then they step up to a bigger one. We're going to have to look and see what happens. And again, don't worry about things that you can't control, don't worry about the things that might or might not happen, just focus when things do happen. Then you can make your investment decisions based on that. Capital gains tax is what you pay on the gain from when you bought it to when you sell it, on a rental property. Each year at the moment, there is a personal capital gains tax allowance. So for the first £12,300 of capital gain, you could take that money completely tax-free. If you own a property with a partner, you both get that personal capital gains tax allowance. In other words, the first £24,600 of profit you can get tax-free. Bearing that in mind, there're many investors who actually sell one property every single year as a strategy to take a hold of the tax-free money. £24,600 tax-free thank you very much, then they take the profit and reinvest it into another better property.

I do that. Because you know, I've been investing for 25 years. Over those 25 years, I bought some properties which at the time, knowing what I knew at that time, seemed like a good idea. But knowing what I know now, some of those properties I would not buy again. So I'm selling some of the properties that are not such good ones, taking the profit, taking the tax-free money, and reinvesting it in better properties. I'm keeping the size of my portfolio about the same, but just making it better and better every year. If I just sold one over year, eventually I'd run out of properties and that's no good. But I think a strategy of selling one a year is a really good thing to do. There's talk of this personal capital gains tax allowance that might be changed. They might get rid of the partner, where you can do this with a partner as well. Again this is just one of the things they've talked about. It means when you sell a property, you're going to make a lot, and you're going to have a lot more tax to pay because you may not have such a capital gains allowance. But as I said before, you only pay this tax when you actually sell the property. If you don't sell the property, you don't pay the tax. If you've got the property within a company, its corporation tax you're going to pay and you don't have to pay capital gains tax which is currently 19%. Again that amount might change, but we have to look.