Investment Landlord Tips Regulation

Frozen Out?

Written by Sarah Walker

With the freezing of the ‘indexation’ tax relief, what’s the impact on landlords who own property through a limited company? 

When it was announced in March 2016 that capital gains tax was reducing by 8% for all assets other than property, it was something of a last straw on the back of buy to let landlords, who had already been clobbered with the news they were soon to face an additional 3% stamp duty on investment purchases and mortgage interest relief at higher rates was to be withdrawn.

So, looking to protect their financial futures and in an effort to offset an impending drop in profits, some landlords decided to shift their strategy to buying properties within a Limited Company. Although there would be additional admin costs and other obligations, many felt it would be worthwhile over the longer term, partly because while personal capital gains tax sits at 28%, corporation tax is just 19%, and partly because of the rather nice indexation allowance supplied by HMRC.

Under the current system, when companies sell an asset, HMRC gives them a figure relating to the year the asset was purchased. They multiply the original purchase price by this figure and that amount is deducted from the gain as a means of offsetting the impact of inflation over the time; the remainder is liable to corporation tax.

For example, a property purchased in April 2010 for £200,000 and sold for £250,000* in November 2017 would receive an indexation allowance of 0.238. That means a landlord’s limited company could deduct £47,600 from the capital gain of £50,000, leaving a taxable gain of just £2,400.
(*According to Nationwide data, the average UK house price increased by 25% over those 7 years.)

But as of 31st January, HMRC is freezing this indexation allowance. That means for incorporated landlords who already hold property, there will be no further relief, although historical relief will still be applied when they sell. For landlords who buy property within a company from February onwards, the full capital gain will be liable to corporation tax when the property is sold. You almost get the feeling the government doesn’t want the private sector’s help in housing the UK’s growing population…

Published in The Telegraph in November 2017, Genevieve Moore, of accountancy firm Blick Rothenberg, said: “The proposed freezing of indexation allowance for companies is not unexpected and will have most impact on companies that have owned [properties] for many years….businesses should be prepared for an eventual abolition of the relief in the future and plan accordingly.”

A final ‘sounds-obvious-but-I’m-going-to-say-it-anyway’: all tax can be complicated, but property tax has very specific rules, so it’s sensible to take advice from an expert in the field to make sure you’re declaring everything you should, while mitigating your tax liability. If you can find an accountant and/or financial adviser who invest in property themselves, you should be on to a winner.

About the author

Sarah Walker

Sarah Walker is a freelance writer and editor with extensive knowledge of the property investment industry.

A former estate agent and television presenter, Sarah has spent over a decade writing for industry publications and leading UK property companies, producing a wide range of marketing and PR content, including consumer guides, newsletters, website copy, articles and reports.

She has ghostwritten a number of property investment books, edited several others on property, business and branding, and continues to work with entrepreneurs to produce literature that supports their business enterprises. Sarah has been both a landlord and a tenant herself and has invested in the UK and overseas.

Away from her laptop, she’s a keen photographer and loves exploring the Scottish Highlands. Skiing is her sporting passion and she’s an enthusiastic member of her local amateur dramatic society.

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