Capital Gains Tax (CGT) is payable on…capital gains – profit after costs.
In the US, part of President Biden’s proposal for his American Family Plan is to potentially make property investors, amongst other wealth accumulators (Note: not wealth creators such as business owners) pay for the plan.
Unfortunately, like most tax loopholes and avoidance techniques those individuals, not necessarily flouting rules (or the spirit of), will be caught out.
It may not be the individual that’s got a couple of properties to help with their retirement that Biden has in sight; but they will pay more after the changes.
Biden (and the wider Democratic party) have the bigger property portfolio holders –such as Trump’s son-in-law Jared Kushner, in their sights.
In the US property investors can defer any gains indefinitely and even beyond death (via 1031 exchanges).
This has been in place for many years and the root of it lies in, for example, an agricultural business (farm) being passed down the generations and escaping punitive ‘capital gains tax’.
However, the mechanism has been used and abused, so if (more when) the changes are made, it will apply to profits on property sales of more than $500,000.
Capital Gains Tax on Property – Your Opinion Counts (sort of)
Before we go any further, just think about what your own opinion is on this subject.
Should a government’s taxation package;
Reward workers? Building infrastructure, a health system, Education, Social Care etc?
Or
Reward wealth accumulation (For wealth accumulations sake?) I.E. Tax Advantages, Loopholes etc.
Of course your view will be formed by your own experiences and circumstances.
Whether you believe in ‘society’ or not, will social cohesion improve or deteriorate if further income and wealth ‘inequality’ continues?
What has the Increase in CGT in America got to do with the UK?
Well, the writing is already on the wall in the UK.
But before CGT let’s get the Stamp Duty Land Tax (SDLT) out of the way!
Whilst the much-publicized (SDLT) holiday has been heralded as a great success, the real outcome has been a massive shift of larger property portfolios.
As with any over inflated market (remember property has been propped up by ultra low interest rates) ‘savvy’ investors have been cashing in.
Getting out at the top.
The ‘average Joe’ just thinks of £1,000s saved on upgrading to the next property.
The UK Government has (using a classic sales technique to encourage activity) created a ‘time pressue’ to entice transactions and movement.
In order to benefit from the higher SDLT exemption you must transact prior to July 1 2021 before the exemption is decreased from £500,000 to £250,000.
In October 2021 it will decrease further.
Strikingly, any benefits of not paying SDLT have been erased by the increase the price the ‘average Joe’ has paid anyway (annual prices are up 9-10% Febuary 2020 – February 2021).
In contrast a savvy property portfolio investor/manager will have ‘cashed in’ on the further property price increases and simply ignoring SDLT as it’s irrelevant!
Capital Gains Tax on Property – Calculation
Whilst many property investors will have their portfolios via private companies many smaller investors don’t.
They’ve cruised along completing yearly tax returns and gotten used to just (if they’re honest) declaring any income.
Unfortunately, in terms of CGT the story will be different.
As it stands CGT is 18% and 28% in relation to property gains.
What you effectively pay depends on your personal taxation basis.
Watch the little video below for a quick calculation based on generic example with just a £100,000 gain to get an idea.
Used in basic CGT Property Illustration
Low income £15,000
Personal Allowance £12,570
Costs £27,000
CGT Allowance £12,300
Total profit/gain
£60,700
Tax @18% = £6312.59
Tax @28% = £7,176.40
Total £13,489 Tax
In your back pocket £47,211.
Capital Gains Tax on Property – Tweaks that are Easy to Implement
If 28% was applied to the whole amount you’d be paying £16,996, so £3,507 more.
And if the CGT allowance was taken away potentially paying £29,296.
Keep in mind that those investors mitigating CGT liabilities as part of a wider tax avoidance strategy will have many other types of ‘gains’ I.E Shares, Paintings, Antiques, Business Assets etc.
Changes around CGT (it’s application and collection) will not change in the broader sense, and impact the many ways that income is disguised.
Changes will specifically target property, and more specifically ‘Buy to Let’ property investors.
Changes in CGT specifically in relation to property (and profits obtained through speculation) will be easy to push through.
Just wait and see.
Disclaimer: Of course, there are several circumstances that may apply, and professional advice should always be sought. Personal opinion of author.