Effect of Tax Changes on Investors


In this blog post, I'd like to share with you the effects of the proposed tax changes on us as property investors. I want to start off this post by saying these tax changes don't sound like good news for us as property investors. However, this kind of thing has happened before, and we need to accept that one thing in life is certain, and that is that we're going to get changed. There's certainty that will be changed. So when things change and happen sometimes I might say, "Oh my God, we can't invest in property." For example, I remember when they introduced the additional 3% charge stamp duty for property investors. I know a lot of investors who thought "Oh, that's it. Properties are going to be too expensive to buy. We can't do it anymore."

But actually as professional investors, we just adapted, we made sure that we were negotiating an extra 3% or more off the purchase price to make sure that extra cost was covered. So it's all about adapting.
Back in 2015, the government announced they were going to bring in section 24 in April 2017. What that meant was that previously, we wanted to own property in our own name, that was the most tax efficient way of doing it as that’s what most investors did. But now moving forward, most people are buying property in their company name because it's more tax efficient. This is because if you own property in a company structure at the moment of time of writing this blog post, section 24 does not affect properties held within a company structure, so that's why most people put their property into a company.

Why the Proposed Tax Changes Are Happening

Now, the proposed tax changes are, first of all, a change to corporation tax. So if you own your property in a company, you're going to be paying more tax. Also, there's a proposed change to capital gains tax. So when you sell a property you own in your own name, you pay capital gains. So this is going to affect investors. But first let's think about why the government doing this. As we all know, in March 2020 the UK was hit by COVID-19, this pandemic that had been sweeping around the world, and the UK went into lockdown for a couple of months.

The government introduced lots of ways of helping the general people, and I think they actually did a pretty good job. They introduced the furlough scheme where rather than companies laying off loads of staff, they put them on furlough and they got at least 80% of their salary, which is better than nothing. They also bought out the bounce back loans and the simple loans. The government has been spending lots and lots of money to help businesses and the general population. In reality, that's got to be paid for somehow. I'm not surprised that the government are talking about and looking at increasing taxes. These are two of the taxes they're looking at implementing a rise. So let's look at each of them in time. .

“Now, the proposed tax changes are, first of all, a change to corporation tax. So if you own your property in a company, you’re going to be paying more tax. Also, there’s a proposed change to capital gains tax.”

An Increase in Corporation Tax

Of course these are just proposals at the moment as we're going to need to see what happens in the next budget first. And sometimes, the government talk about things but don't actually bring these things in, and sometimes rates change, but I'm just going to talk in general terms at the moment. So there's a talk about increasing them out off corporation tax. Corporation tax is the tax you pay within a business when you make money. If you don't make money, you don't pay the tax. But hopefully, as a successful property investor, you're going to be making profits on your investing, and that is subject to corporation tax. They're talking about increasing that amount of tax which means you'll pay more tax and have less money after tax within your business. It's something we just have to take on. Again, like I've said, we have to adapt when things happen.

An Increase in Capital Gains Tax

The other thing is they're talking about increasing capital gains tax. Capital gains tax is where you sell a property that you own in your own name, or if you sell shares in your own name. Let’s say you bought a property here and you sell a property here for higher value, the difference between what you bought it for and what you sell it for is the capital gain. There are some things you can take off. You can take off the buying and selling costs of the property. You could take off any capital improvements you've made, such as putting a new roof on and that's known as a capital improvement. But once you take all those costs off the profits left over, you have to pay tax on that. We each have a personal capital gains tax allowance, I think it’s currently £12,300. You could sell one property a year, or as many properties as you want, and the first £12,300 is tax-free. If you own it in joint names with a partner, you both get that £12,300, so you get £24,600 tax-free. In fact, selling one property a year can actually be a pretty good strategy. As long as you take that profit and reinvest it in another one. Otherwise eventually, you'd have no property left.

But I do that, I look at my portfolio each year, I say, "Okay, what's the least performing property? Or where's the property that I've been struggling to rent out? Or where's the property where if I look at the the return I'm getting based on the equity, it's not such a good deal?" So I sell at least one property a year, I take my tax-free money, and then reinvest the profit back in another property, that's a better property than the one I sold. So that's quite a good strategy to use. However, the extra profit left after your personal allowance, they're going to increase the amount of capital gains tax on that. A long time ago it was 20% and 40% based on your personal tax level, and then they brought it down to 18% or 28%, again based on your personal tax level. There's talk of them putting that up. So just be aware of that if you're going to be selling a property, that might be a consideration.

“Selling one property a year can actually be a pretty good strategy. As long as you take that profit and reinvest it in another one.”

Retaining Your Properties for the Capital Growth

I want to stimulate your thinking here by reminding you that if you never sell a property, you never pay capital gains tax. I've sold properties in the past and I've generally regretted selling properties I've sold. In fact, I'm going to write another post you should look out for on this blog, all about when you should sell, and if you should sell property or not. So look out for that one.

But generally, I've regretted selling because the capital growth has been incredible and I should have really retained those properties. If I'd never sold those properties, I'd still have them of course, but I would have never paid capital gains tax. You might think, "Well, what about when you die?" When you die, all capital gains tax is wiped out. Why is that the case? Because, instead, you're taxed on inheritance tax. Inheritance tax at the moment is 40%. It might well change, who knows? But at this moment in time of course there's a 40%. So what that means is that they won't tax you on the gain that you've had, but your estate is taxed on the equity and the net assets in your estate, which is a higher tax rate.

 

Invest in a Qualified Tax Specialist

There are some clever planning you could do to minimise your inheritance tax, and I highly recommend, when it comes to tax, and I'm talking very general I can't give you tax advice of course, but you know what? I think it would be really good. If you want to be a property investor, to make sure you invest some money in a proper qualified accountant who has a property tax specialist to make sure you set things up in the right way. In that way, you can set things up to make sure that once you're no longer here, you could pass a legacy onto your loved ones, onto your family, and they're not losing 40% of it to the tax man. I'm all in favour of paying taxes, we need to contribute to the roads, the National Health Service and the schools, etc., but I don't want to pay excessive tax. In fact, I think I'm going to write another post all about minimising tax costs, so look out for that particular post on this blog.

My Final Thoughts on the Effects of the Proposed Tax Changes

The tax changes they're talking about potentially sound like bad news, and yes they are bad news, we have to pay more tax but there's always a way to work with these things. We just have to find better deals. The final thought I want to leave you with, I sometimes meet people who worry about the amount of tax they're going to have to pay, but I think that's a reverse way of looking at it. You should look at it like this, if you're paying lots of tax, it means you're making lots of money. I have sometimes met investors who say, "Oh, I don't want to do that 'cause I'd make too much money, and I'd have to pay too much tax." That's crazy. If you're making money and making profit, that's when you pay tax. With some clever tax planning, you can reduce the amount of tax you pay.



I do hope this post has been useful and I hope it's going to stimulate your thinking and make you a more successful investor. So as ever, I encourage you to invest with knowledge and invest with skill. I look forward to helping you with more blog posts in the future. Thank you for reading!
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