Capital Gains Tax Changes in 2021


In this blog post, I'm going to talk about the capital gains tax changes in 2021. This is a really important post. If you're a property investor, you need to understand what could potentially happen to capital gains tax because it might influence the way you're going to invest. With all the property investors network networking meetings around UK, we have our eyes and ears plugged into what's happening at the grassroots level all around the UK. Believe me, there's a lot of concern about capital gains tax changes in 2021. The Chancellor, Rishi Sunak, has been talking about how there might be changes. Now, why is this happening? Well if you think about it, in 2020 the government spent a huge amount of money supporting the economy. They introduced the furlough scheme.

They said to employers, "Rather than making people unemployed, if you don't need them right now because of the recession and the pandemic, just send them home. You pay them 80%, they can't do any work, but we will help you fund their salary." It was a great scheme brought in to stop millions of people suddenly losing their jobs and having to claim unemployment benefits. It was initially supposed to be for three months, then it got extended to October 2020, and now they're talking about it going on potentially until March. I think they've done that because if they ended it in October, millions of people in November would have been made unemployed. It would have been very bad for the spirit and the morale of the country. It would have completely ruined the last two months in the economy. So this is a massive amount of money that's been spent. They also gave out money through bounce back loans and civil loans to help support businesses and all the other schemes they've put out there. This money has to be paid for. It's not a gift, it's got to be brought back. So there's no doubt in my mind that, and the Chancellor's made it very clear that, somehow this has all got to be reckoned for, it's got to be paid for.

Property Investors Are Often Seen as Easy Targets

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.

“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”
 

Understanding Income, Corporation and Capital Gains Tax

Let's talk very practically about capital gains tax and income tax. If you own property in your own name, and that was always the most tax-efficient way of doing it, then you pay income tax on income that comes in. If you own property in your own name and you're renting it out, the profit you make is affected by income tax. In April 2017, the government introduced Section 24, which changed the way that they calculate the tax on rental profit. What it fundamentally means is if you own property in your own name, which most people do, and if you're a high rate taxpayer and you've got mortgages, you're going to pay a lot more tax on your property portfolio. For this reason, a number of people have been moving to companies. If you own property within a company, you pay corporation tax, that's the tax that businesses pay. Currently, at the time of writing this, it's 19% but I fully expect the government will increase that tax so they can get some money back for all the money they spent during 2020 and the pandemic. So, owning in your own name, you pay income tax. Owning in a company name, you pay corporation tax. Now what about capital gains tax? This is what people have been saying could well double. Capital gains tax is a tax you pay when you own property in your own name and you have a property that's not your main residence, you rent that property out, and then eventually you decide to sell that property. Let's say you bought a property years and years ago for £100,000 and it's now worth £300,000. It's kind of a doubled in value and almost doubled again, maybe over a 15 or 20 year period. That's generally what happens in property, which is why it's so good to have property. That increase in value. If you own the asset in your own name, then when you sell it, you have to pay capital gains tax on the profit. Let's just be really clear exactly what the profit is. Well you take the sales price, less the purchase price, and then you can offset any buying and selling costs and any capital improvements you've made to the property. All the things you've spent on it, to capital it, to increase the value, you can deduct all of those. What's left over is the profit on which you have to pay your capital gains tax. Very often people make a mistake. They think it's all about the amount of money they take out of the property. Let's say a property's worth £300,000 and you've got a mortgage of £200,000. When you sell it, you're going to get a profit of a £100,000 because you paid off the mortgage. People think that's what you pay the tax on, but it's not based on the mortgage amount, it's what you bought the property for in the first place. So it's really important you understand that.

If You Never Sell a Property, You Never Have To Pay Capital Gains Tax on It

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.

 

Keep Up To Date with the Latest Tax Information

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.

“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.”


I think it's really important to keep up to date on this kind of information. I do regular updates on this blog. There's a whole load of posts on this blog, I really encourage you to read them and really make sure you understand about how you can be a successful property investor. Thanks for reading!

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