Your property tax bill since Section 24

In my last blog post here I was thinking about how our property strategy and aspirations affect our tax bill and this week, I’m going to look at how our tax bill has changed since the amendments to Section 24.

To start off, let’s set the scene by looking at how it used to be in the old days. Really, it was all pretty straight forward – well, I say this a little bit tongue in cheek as there’s very little about tax that’s straight forward. But, it was quite simple to work out what you needed to do to ensure your property business could be as tax efficient as possible.

Quite simply, if you were going to buy properties as buy to lets then usually the best way of doing this was to hold them in your own name. (Usually, six months to a year would be considered a legitimate amount of time to hold a property as an investment). Then, when it came time to selling on the properties, you’d be able to use your Capital Gains tax allowance. At the time of writing, this amounts to £11,300.

Also, to increase the tax efficiency of your holdings, you could buy your properties jointly with a partner – a JV partner, spouse, significant other or any other person of your choice – and you could both use your Capital Gains allowance.

On the other hand, if you were buying properties to flip or sell on, then this would be best done through a limited company.

This is something which has caused confusion among investors as many have assumed that if they were to purchase a property that was to then increase in value, because the capital value had increased, they would then think that they would be subjected to Capital Gains tax. This was not the case. In the eyes of HMRC this was considered “a trade”, and as a trade this was seen to be an income-producing activity rather than a capital-producing activity. As such, they would be charged Income Tax instead.

Where HMRC is concerned, it all comes down to intention. If they believe you started your business with the intention of flipping and trading properties, then they would want to charge you Income Tax.

With this in mind, the received wisdom was that if you were going to flip properties and wanted to be as tax efficient as possible, then this was best done through a limited company.

Corporation Tax is what a limited company would be charged, so let’s have a think about this. At present, Corporation Tax is currently at 19%, although the Government has recently said that it wants to take this figure down to 17% by 2020. Whether or not this happens of course, is still to be seen.

Whilst we don’t know what will happen in the future, as things stand today, Corporation Tax at 19% is still less than Income Tax. What’s more, this percentage is significantly less than the higher rates of Income Tax.

I’ll be going into this in more detail in the coming weeks but essentially, it was as simple as that. If you were going to buy and hold property then the best way was to do it in your own name so that you could take advantage of Capital Gains tax allowances, and if you were going to flip property, then you should do this through a limited company.

In terms of flipping and trading property, then the above advice probably hasn’t changed. Nevertheless, this is a very simplistic view and doesn’t take into account your own personal circumstances.

To summarise and following the changes to Section 24, in my eyes holding buy to let properties in a limited company, which can still off-set mortgage interest when calculating Corporation Tax, and using a limited company for flipping, would probably be the most tax efficient way of running your property business.

Please remember though that I’m not an IFA or an accountant – these are just my thoughts rather than actual tax advice.

Here’s to successful property investing

Peter Jones B.Sc FRICS

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