Capital gains tax is perhaps the lowest hanging fruit when it comes to the Chancellor collecting additional revenue to pay for coronavirus and Brexit costs.
Current capital gains tax rates:
It is rumoured that the Chancellor will increase capital gains tax to normal income rates i.e. 20%, 40% and 45% in 2021. This may make huge differences when we decide what type and value of property to invest in.
Would you buy 1 x property worth £300,000 or 3 x separate properties at £100,000 each?
The table below is an example of sample purchase costs, sale costs, expenses, allowance, taxes due and profits.
|Client 1||Client 2||Client 2 Combined|
|Property A||Property 1||Property 2||Property 3||3 X Properties|
|Properties increase 50% in 5 years and both clients need to sell some/all|
|less Purchase Price||£300,000.00||£100,000.00||£100,000.00||£100,000.00||£300,000.00|
|Less CGT Allowance||£12,300.00||£12,300.00||£12,300.00||£12,300.00||£12,300.00|
|Profit (after tax @28%)||£100,284.00||£36,204.00||£36,204.00||£36,204.00||£101,724.00|
|Profit (after tax @40%)||£85,620.00||£32,220.00||£32,220.00||£32,220.00||£86,820.00|
|But if sell each property in different tax years the profits would be|
|after 28% tax||£108,612.00|
|after 40% tax||£96,660.00|
More money and less taxes are payable when you buy 3 separate , smaller properties as well as offering flexibility on how you dispose of them with flexibility to sell 3 properties over 3 different tax years to make use of allowances rather than just one allowance if you had to sell 1 larger property or all 3 properties at the same time.
This is why we personally buy lower value properties when we can rather than 1 or 2 larger value ones.