What Type of Buy to Let Property Should I Buy?
Published / Last Updated on 02/12/2020
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:
- Non property related gains: 10% CGT rate for basic rate tax payers and 20% for higher rate tax payers
- Property related gains: 18% CGT rate for basic rate tax payers and 28% for higher rate tax payers
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 | |
| Purchase Price | £300,000.00 | £100,000.00 | £100,000.00 | £100,000.00 | £300,000.00 |
| Legal Fees | £1,500.00 | £1,500.00 | £1,500.00 | £1,500.00 | £4,500.00 |
| Stamp Duty | £14,000.00 | £3,000.00 | £3,000.00 | £3,000.00 | £9,000.00 |
| Total Cost | £315,500.00 | £104,500.00 | £104,500.00 | £104,500.00 | £313,500.00 |
| Properties increase 50% in 5 years and both clients need to sell some/all | |||||
| Sale Value | £450,000.00 | £150,000.00 | £150,000.00 | £150,000.00 | £450,000.00 |
| less Purchase Price | £300,000.00 | £100,000.00 | £100,000.00 | £100,000.00 | £300,000.00 |
| less Expenses | £15,500.00 | £4,500.00 | £4,500.00 | £4,500.00 | £13,500.00 |
| Less CGT Allowance | £12,300.00 | £12,300.00 | £12,300.00 | £12,300.00 | £12,300.00 |
| Taxable Profit | £122,200.00 | £33,200.00 | £33,200.00 | £33,200.00 | £124,200.00 |
| Tax Payable | |||||
| if 28% | £34,216.00 | £9,296.00 | £9,296.00 | £9,296.00 | £34,776.00 |
| if 40% | £48,880.00 | £13,280.00 | £13,280.00 | £13,280.00 | £49,680.00 |
| 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.
