In order to mitigate tax liability landlords need to think about capital gains early, get software, speak with advisors, and plan your exit.
In this episode of My Property World Panel our panel of experts discuss capital gains taxes, what landlords need to know, how they might increase in the future, and what investors can do to plan ahead and mitigate their overall tax liability.
Christine Janaway: Chartered surveyor, property professional. | Visit CJResidentialltd.co.uk or find her on LinkedIn
Logan Ransley: Co-founder of Landlord Studio – a property management software with over 30,000 properties currently on the system. | LinkedIn
Tony Gimple: Property entrepreneur, investor, and advisor. | LinkedIn
Watch the full episode on Youtube, listen to the podcast on My Property World Podcast or read the edited transcript below.
We’ve got a number of questions from the audience, particularly from our users. One, just covering an overview of capital gains tax, what landlords need to know how much they need to pay, what’s deductible, etc. And then I’m quite keen to dive into some of the reasons why the government proposed capital gains tax and change the rules or at least the OTS review.
And then explore short of the term changes that landlords have to contend with and what they need to know about in the long term as well.
From my point of view, my clients always say asked me the same question no matter what the topic is, if something has changed, or is proposed to be changed, they always say to me, what am I supposed to do about this? How do I manage this? How do I deal with it? What’s the best way to navigate this particular issue? They’re always very keen to know what they should do about it.
In this case, it’s capital gains tax. From my point of view, it would help to have some practical advice on the steps they can take to minimise their capital gains tax.
So why don’t we just take a step back and maybe look at it from a historical context? Why did the government introduce the capital gains tax in the first place, what was discussed in this OTS review, and what were the results of the capital gains tax review?
The government typically looks at the structure on a high level. What are they trying to do within the economy? They are looking for ways to get the economy going and maximise that tax take on a sustainable basis.
Now, typically capital gains are seen as a constraint as people are less likely to invest in things where there’s going to be a higher level of capital gains, all else being equal. Now, we’ve got a slightly unusual situation going on at the moment, there are levels of unanticipated growth basically, and if you look forward two years from now, the likelihood is that there’s going to be significantly higher levels of capital gains tax gathered.
Now, capital gains tax as a whole is a relatively small part of the overall picture as far as the overall HMRC tax stack. So, that would be one key point. However, if you’re an individual landlord, and you’ve spent a number of years, perhaps building up a portfolio, and you’re now at the point that you’re looking to dispose of some of your assets, and you haven’t made provision in terms of adequate planning, you don’t have a good tax strategy, you don’t have an advisor, haven’t structured things in a measured way then you don’t necessarily know what the numbers or the implications are.
You’re going to have a problem regardless of if the capital gains tax rate is now at a higher level. Why are they talking about potentially putting it up a bit more? I think the answer is they want more taxes.
Do you think there’s any sort of strategy around trying to shift certain types of investors out of the market?
The government’s plan for the last 10 years has made it much harder for small portfolios, or what you might call accidental landlords. What do you think, Tony?
As a strategy, if any government has a strategy – you have to look pretty political, and regardless of what kind of tie are you wearing, even if you start out with great intentions wanting to do the right things, when you find yourself in power it all goes to hell because you become a victim of circumstance.
We live in a democracy. Stuff happens. The government has to support us, support those who can’t help themselves. Deal with crises, fight the occasional war, etc, etc, etc. All taxes go up over time. Taxes are the blunt instrument to replenish the coffers. It means that tax goes up, but the worst thing is you don’t know where it’s being spent. I suspect if any government decided to increase income tax by a penny at a time and every penny would then be spent on education or health people wouldn’t mind paying a little bit more tax.
I don’t know if any of you are involved in children’s sports clubs, but when they’re looking to fundraise, it’s always a lot easier to fundraise for the under-sevens tracksuits. Then we have some money for the club.
Exactly. Well, if you look at capital gains, in particular, the best way to mitigate capital gains is don’t sell the asset. Simple. Why would you want to sell an income-producing asset? Just when you told me you’re taking into account all of the costs of selling any taxes, agents fees legal fees, replacing that asset? Almost certainly, you’ll never make your money back. And chances are the person who sold it to doesn’t like the tenant, wants to get them out, and so you’ve done a thoroughly bad job for yourself and everybody else, in fact. The only person that has benefited is the investor of the day.
But, on the basis that the government, as we said for the last 10 years or so has been actively taking incremental steps to encourage small and accidental landlords out of this market, a lot of them are of the mindset that they do want to sell because they just can’t cope with it anymore. The pandemic has put a top hat on it with tenants not paying their rent and they can’t evict them and all the rest of it. So, some of them will have to sell. So, Tony, what would you add? Are there any, I don’t know as far as easy ways, but ways to minimise your potential or actual capital gains tax liability?
In essence, all CGT is the difference between the total sale price minus what it cost you to get to that point in the first place. So, record all of the costs required for disposal so you know how much it’ll cost you to get rid of it, and keep excellent records throughout the time you own the property to ensure you know how much profit you’ve made and if it’s even worth selling. If you own the properties in your own name, you’ll end up paying, one problem if you’re a higher rate taxpayer or beyond it could push you into higher rate tax. You will pay a considerable amount in CGT capital gains tax.
So, you can deduct improvements currently, capital improvements when you sell. The things that you can’t deduct from your income as you’re going along, I suppose is the way I think about it.
Yes, but each case is individual. What we have to avoid like the plague is giving out detailed answers because so much depends on whether it’s personally owned, the partnership, your tenants, whether you’re owning it through a limited company. The variables are too many to give detailed answers. But what you can say for sure is you’ve got the total sale price, less than the total purchase price and everything basically spent to get between those two points. And if you have made anything that’s when the tax is going to be due.
So, we’ve seen a lot of landlords starting to shift their rental properties into limited companies. What are the benefits of doing that in relation to capital gains tax and maybe the drawbacks as well?
Oh, you know what, why would you? Let’s assume for one minute that you actually qualify for what’s called Section 162 Incorporation relief. You can move it over from personal ownership into a limited company without paying stamp duty and effectively rolling over the CGT. How are you going to get your money out?
Your director’s loan account will run out at some point, you’ll be paying 19% corporation tax. You’ve got income tax rates, loan account tax, employers National Insurance, employee National Insurance. I think there are about eight different taxes.
Moving a personally held residential portfolio into a limited company, generally speaking, and I’ve been twice in the game now five, six, nearly seven years, I’ve spoken with huge audiences about it, and I’ve yet to find somebody for whom it actually made sense to do it once they added up all the costs. But there’s always going to be one. There’s always somebody who actually that for whatever reason, it turns out to be the right solution.
When done properly, how you own it is less important, than why you own the property. Why did buy it in the first place? So for things like you know, the social housing, commercial property, probably limited company ownership does start to make a bit more sense. But again, there was no detail. Why are you doing it? How did you get to that point? Where do you want to go thereafter?
If you put your properties into a limited company, and you start to build wealth or value inside the company itself, that could potentially be sold later on. Does that counteract any of those additional considerations that you have to take around taxes etc? In the long term, would it work better?
In the long term? No. If all the business is doing is collecting rents from residential properties it’s never in a million years going to be a trading company.
But regardless of what structure you ultimately choose, there’s a very simple framework where you look at the costs and benefits in tax implications and weigh them.
Now none of us are accredited tax advisers. But we are all actively involved in property in portfolio level stuff, and all of us, I think, without exception, would advise you to do your homework and talk to some experts, ideally talk to two or three before selecting the one that’s going to plan your tax strategy. Having someone to do your accounts each year is very different from designing a tax-efficient structure that’s going to suit your own strategy.
I think Tony hit the nail on the head. Are you up for income all the way through? Are you looking to build a pension pot? Are you looking to create a wider wealth creation vehicle? What are your priorities? And what’s the tax wrapper that sits under now?
We want to address some of the fears that these particularly smaller landlords have about the future. What would your advice be to them coming to you worried about all these new financial and legislation changes?
Sure. You’re not going to do about it. Going back to Christine’s point and I’ll revert to dovetail nicely back to Logans, first of all, tenants and toilets are hard work, no matter how many times you build a property, buy a property, rent it out, it will always be hard work whether it’s you doing it yourself or through an agent. Guaranteed. Three o’clock on Sunday morning somebody will find your home number and say my pipes burst. It’s just the way the world works.
Are governments against accidental landlords? Not specifically. All they want to do is the maximum tax take for the least possible effort. And that’s section 24. Knee jerk reaction, try and lower your tax, maybe go into a limited company. But once you’re in that company, you’ve got all sorts of other problems is limited companies are totally visible.
And your corporation tax will go through the roof for smaller landlords. If you are really determined to get the hell out you’ve had enough and want to get on with the rest of your life. Find the right advisor who can connect with you as an individual.
It is a chemical thing, another version of the dating game. It’s all about finding somebody. If you want to invest and then sell the property for the highest possible price, get the maximum in legitimate deductions, then you want a specialist in this area. Take them on, pay the tax, and go off and sit on a Caribbean beach. I know this is gonna sound like plaster chairs, a simplistic answer and the listeners/ viewers may or may want more technical detailed answers. But if you’re very determined to get the hell out, if the property is loss-making, it probably won’t have much in CGT anyway.
Now suppose if you’ve got say 3,4,5 properties, you could just sell one a year to minimise the capital gain, use your allowance every year, spread it out. In essence, capital gains tax is another version of income tax. And if you look at some of the reviews coming out it may not just affect landlords.
One of my final questions would be, what are some of the day to day operational aspects or things that landlords should be really keeping an eye on and keeping organised to make sure that they’re not shocked or surprised with any sort of capital gains or tax bills?
My number one thing is understanding what your structure is and making sure that you’re staying up to date was what those numbers are. If you move one of the levers, what does it mean in terms of, what do you end up with on the other side? It’s a worthwhile exercise and the earlier you start this planning process the better.
For a final question, why would someone sell up cash flowing assets? So, I’m involved in multiple portfolio acquisition negotiations currently with people who have spent basically the middle age and a little bit more building and then maintaining their portfolio, they’ve had enough, they want to get out, there’s something going on in the background, nothing to do with property or wealth, and they’re wanting to basically get the cash out.
In general, they’ve under planned. There’s also a lack of understanding about how best to market a portfolio. Indeed, how do you actually dispose of it? Quite often where we’re buying there’s a there are tenants in situ. So whoever is going to buy that is going to be an investor. Can you sell those individually if they’re below the mortgage threshold? That’s becoming less common as prices are rising, but in general, you’re going to need either a cash buyer or someone who’s geared up to make a portfolio purchase. How do they approach it? The vast majority of investors I know would look at it on yield prices.
If you haven’t thought about valuing your property in that way because you’re busy being a landlord, then you might be following the local house prices, but this has got no relevance, it’s not really how it works, it’s not why someone would pay that or indeed how someone could buy.
Now, this is all before you factor in the capital gains implications and so there’s a lot going on, and it’s astounding how many people get into their 60s and 70s and they’ve never sold a property. They might have you know, 10 properties, 30 properties, or more and they’ve never sold one, not one and it’s a different mindset. It’s a different process.
There’s a huge difference, it doesn’t matter whether you’re selling properties or anything else for that matter. You have to think about the value of the portfolio as a whole. Like you say, with the best bits and the worst bits bundled together because if you do just cherry-pick, the sum of what you actually get is probably less than the sum of the whole. Most experienced investors are willing to take a bit of the dodgy rough stuff to get to the best bits.
You’re absolutely spot on Christine. You’ve also got landlords who are highly professional, seriously care about the welfare of their tenants. They’re almost social landlords. We’re sold out. Yes, he wants to sell the house but only if he can find the right person, a purchaser who will apply the same standards that he has applied to the tenants.
This is one of the things Landlord Studio is really for. If you want to maximise your price, you’ve got to approach this as you’re presenting a business, and a well-run business with solid bottom line figures and profitability. If you’re able to demonstrate that clearly through good information, that’s consistent that’s recorded and presented to an agreed standard, that’s in a readable format that anyone can look at quickly and say that this is there’s a reasonable degree of confidence that this is what the profit will be going forward. It’s quite simple for a prospective purchaser to make a decision that yes, this is good. And if they can make that decision quickly, sometimes you end up with a couple of them and you end up someone paying a little bit more.
One of the banes of my life is trying to extract information out of a poorly prepared portfolio situation. I’m involved with some quite significant portfolio owners and hundreds of properties, and they’re poorly run and from our perspective, it’s good because ultimately we’re going to be able to identify wins that they haven’t. But it’s going to reduce what the purchase price is because they haven’t been presented in a way that it’s clear what we’re buying.
Now, Landlord Studio starts at £5.99 a month. This is really nothing to get started. And you could probably get a discount of more than that from your accountant because you’ve saved them so much time.
Run it like a business. It is a business like anything else.
One of our users had around 16-17 properties at the point when he finally decided he needed software to manage his business. And when he transitioned from a spreadsheet into Landlord Studio, he realised that one of his properties was only making something like £14 a month in profit. He’d been scratching his head all these years wondering where why he wasn’t making any money. Then he input his data into Landlord Studio and he was able to identify the issue and fix the problem.
It just goes to show like that lack of insight into the financials of your rental business can actually ruin a long term rental business.
Essentially what we’ve done with Landlord Studio is we’ve made that as easy as possible, and to Will’s point about how you can plan track can and get the most out of your property. We do three main things, tracking all the asset values so you know exactly how much equity you have. We track all the income and expenses so you know your cash flow and can calculate your tax bill. You can even pull transactions straight from your bank accounts. And this allows you to generate a real time report where you can see, analyse, review all your financials for your portfolio. Ultimately, this gives you the planning capabilities and insights to operate a professional businesslike portfolio.
And much easier for your accountant when you come to hand that over at the end of the year.
Yeah, and they’ll be much happier.
Finally, we’re gonna get you to sum up your top three points regarding landlord capital gains tax.
Don’t service really have to to don’t let the tax tail wag for planning dog and stray. Only buy that which you don’t know. And not just somebody repeating back what you’ve already told them in order to take you on a supply. One more thing, have some fun. It’s coming up to Christmas so enjoy yourself.
My key points: know the numbers. It’s a repeating repeating lesson from these podcasts. Know the numbers, plan, and make sure that you have total insight over how you’re operating your business so you’re not shocked by new legislation changes that are coming up.
Think about your exits. Keep all your records, keep everything, use Logan’s software obviously, keep it all. The one way to minimise your capital gain is to have as many deductibles as possible so that to do that you need evidence, and you need to keep your records. You must keep all your records and you must keep them in a format that the taxman is gonna say, yeah, that looks fine. Because there’s nothing worse than the taxman crawling in and out of all your information.
I think starting early is probably the one thing I’d add to this. So, knowing your numbers, knowing what the implications are having taken advice from. Not to do so and you’re essentially stealing money from yourself or the people who are important to you down the track. It doesn’t cost much to investigate these things at a basic level. And, as Tony said, have fun. When it’s not fun, it may be time to get out.
Capital gains is a big part of it. If you haven’t thought about it, start thinking about it. Ask some questions, get some software, get some advisors.