After April’s stamp duty surcharge, the Autumn Budget delivered yet more bad news for buy to let landlords, in the form of an indexation allowance freeze. The legislation will be introduced in the Finance Bill 2017-18.
From 1st January 2018, there will be no relief in chargeable gains by companies on ‘assets’, including rental properties. The change is likely to affect the buy-to-let market and at the same time raise significant revenue for the government, which is expected to earn an additional £1.24 billion over the course of this parliament.
Currently, an individual buying a rental property that rises in value, will pay 28% of the price rise in Capital Gains Tax (CGT) when it is sold. So, if a rental property is bought for £100,000 and sold ten years later for £200,000, £28,000 CGT is payable.
However, a company buying and selling the same property for the same price could deduct the amount of the price rise that was due to inflation, before paying CGT. So, if a company bought the rental property for £100,000 and sold it ten years later for £200,000, and inflation over the ten year period was 3%, inflation would have accounted for £34,000 of the price rise. This could then be deducted from the £100,000 profit before applying the 28% CGT, and only £18,480 is payable.
The discrepancy will now be withdrawn, although it will only affect price rises from January 2018 so companies will not lose any benefit they have already gained.
The removal of the tax advantage is aimed at giving owner-occupiers the opportunity to buy their home on a ‘level playing field’ with buy to let landlords.