9:35 AM, 16th October 2024, About a month ago 25
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Capital Gains Tax – Inflation, the real problem ignored by Government
The government chooses to ignore the impact of inflation on the real value of money, property, and the cost of living. Prior to 2008, indexation allowance quite rightly, and sensibly, helped address this important issue.
I am 80 years old, a landlord since 1980, and still hands-on managing my rental properties as a builder, maintenance man, cleaner, agent, accountant, and in all other aspects of running a successful rental business.
Fortunately, we have no borrowings, and because we are very selective with tenants in Wales, we are profitable. However, this requires a great deal of effort, knowledge, and good business acumen.
Capital Gains Tax, along with Section 24, makes expanding a profitable rental business in 2024 virtually impossible. We want to invest and buy more properties, replacing some of our existing stock with more energy efficient homes to meet current requirements. However, current taxation and Government perception of landlords make this impossible.
We looked at several of our properties, starting with one owned since 1980. Purchased in poor condition for £26,500 with £250 in legal costs, it is now valued at around £350,000. For the purpose of simple calculation, we have ignored the tens of thousands spent over the years to maintain our property in good condition.
The property is let as three self-contained units generating around £27K annually. The building, about 110 years old, with high ceilings and three floors, has well-maintained flats but its old-style construction makes thermal improvements extremely expensive on such a large building.
Calculations for selling and replacing this with a modern building show a dire picture after considering the effect of inflation, hidden legal costs, and capital gains tax. We have ignored accounting for money spent over the last 44 years, selling at £350k shows an artificial gain of £323,250 after initial costs and fees. This gain totally ignores inflation and replacement costs for acquiring a similar replacement business at current prices.
After paying £77,580 in CGT @24%, we would be left with £271,670. Replacing this building with another at £350,000 would incur Land Transaction fees of £21,450 in Wales, plus solicitors’ costs and likely costs of repairs.
In real terms, we will have a shortfall of around £100,000 as a direct result of taxation.
This is the kiss of death to business. Achieving the current £27K rental income from a new building is impossible if we only have £271K left to purchase a new building and associated buying costs and Land Taxes.
This theme runs through our entire portfolio built up over forty years of hard work. Are successive governments incompetent, stupid, or just plain greedy and vindictive towards landlords who have provided homes that the government has failed to provide through its devolved departments for generations?
The current Government is claiming to support businesses and support tenants and housing. This appears far from substantiated by the current treatment of private landlords who provide a substantial proportion of tenanted housing in the U.K.
As landlords we need to scream and shout for common sense to return and lobby for ministers who understand business to speak up and knock a few empty heads together.
The current position for landlords running businesses providing homes for those who cannot afford to buy, is simply legalised robbery, making it impossible for us to run and develop a business providing the homes that Government simply cannot afford and will not be able to provide.
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NewYorkie
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Sign Up12:07 PM, 16th October 2024, About a month ago
Reply to the comment left by JaSam at 16/10/2024 - 10:05
I hope you don't mind me asking, but how old are you, and what's your experience as a landlord?
Jim K
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Sign Up12:21 PM, 16th October 2024, About a month ago
Basically all these helpful comments chow that:
Whatever planning and care you exert, the government can/will changes the rules arbitrarily to suit some short term 'problem'.
You will be left paying the bill.
Keith Wellburn
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Sign Up12:28 PM, 16th October 2024, About a month ago
Reply to the comment left by Jim K at 16/10/2024 - 12:21
If there’s NI on rental income, an Investment income surcharge, CGT based on original cost of inherited property after the budget, we’ll know Rachel Reeves reads this chat board..
Olls63
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Sign Up13:00 PM, 16th October 2024, About a month ago
Reply to the comment left by JaSam at 16/10/2024 - 10:05
Re point 3 - watch that change in the budget!
JaSam
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Sign Up13:16 PM, 16th October 2024, About a month ago
Reply to the comment left by Olls63 at 16/10/2024 - 13:00
I will CGT on death won’t be popular but I suppose if the inherentee also inherits the gain this would close that loop.
John Cook
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Sign Up14:20 PM, 16th October 2024, About a month ago
In round numbers, I bought a BTL in 2006 for £168000, paid off the mortgage and sold it for £300,000 in 2024. At UK average house inflation it would have been worth £279,000 when sold, giving capital growth of £21,000. I made a CGT return to HMRC and paid £29,000 within 6 weeks of the sale (actual CGT rate=138%). Didn't quite work out as I had hoped did it? My investments in FTSE companies over the same period made significant gains (and some losses, I admit) but gave the flexibility to sell off in small tranches to optimise tax efficiency according to the prevailing rules at the time.
Chris Brown
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Sign Up14:21 PM, 16th October 2024, About a month ago
Reply to the comment left by GEORGE WARREN at 16/10/2024 - 11:34
They are
Dennis Forrest
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Sign Up16:24 PM, 16th October 2024, About a month ago
Reply to the comment left by JaSam at 16/10/2024 - 12:23
Interesting article on CGT.
To be fair indexation is a must. Last month I sold a holiday home which I bought in 2002. I got 95% more back than we originally paid for it but inflation has been 80% over the last 22 years. It was touch and go but managed to sell it at a fair price so have 'only' had to pay about £11,000 in CGT at the BADR rate, instead of around £25,000 at the 24% rate.
Overall I have made a very small profit. Paying CGT at 24% I would have made an overall true loss.
Old Mrs Landlord
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Sign Up16:30 PM, 16th October 2024, About a month ago
Reply to the comment left by Dennis Forrest at 16/10/2024 - 11:55The situation you spell out is just typical of government treatment of landlords and the way they manipulate the rules to make sure whatever you do it is heads they win and tails you lose. It's an investment when it means we pay more tax that way but a business if they can impose more regulations and screw more money out of us that way. The final straw is that they now plan to rig the system so that we become, in effect, social landlords to supply the gap in provision they have created by default. We began buy-to-let under a Labour government which had presided over extreme house price inflation but allowed private landlords to operate under free market conditions so we have been abe to adapt to gradual changes until the tsunami of recent developments which amount to a shift in the entire landscape of private letting and put tenants in the driving seat while relegating the actual owner of the property to the role of back-seat passenger. Selling up will mean us paying CGT on 'profit' which is nothing more than inflation. And all the time we get villified and stigmatised as the villains of the piece, causing unfairness to the younger generations while we live in luxury at their expense! Why bother?
NewYorkie
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Sign Up17:46 PM, 16th October 2024, About a month ago
Reply to the comment left by John Cook at 16/10/2024 - 14:20When you hear the 'gurus' talk about capital appreciation, they never mention CGT and inflation.
There's no getting away with it, so rather than worry about how much better I could have done with the money over 20 years, I just ignore the past and look at what I want to do with it now.
I had an interesting conversation with my partner last night, as you do in bed when you're retired.
She had 3 rentals in the South East on repayment mortgages, and one left in the North unecumbered. Her plan was to pay them all down using the rental income [she had a good job] in 15 years, then take the profits for her pension [except, she's now got a great final salary pension]. She did just that and did well. She's just transferred her remaining house to her son, and is presently waiting for the CGT good news from her accountant. My plan was to use interest only mortgages, spend the saving on the mortgages, and sell up for my pension. I had 2 properties in London and 2 up North. Inherently, I knew London would rent very well and provide great capital appreciation, so wasn't so worried about the North, which was just as well, because they've been appalling. Little to no capital appreciation and bad tenants. I did well when I sold up in London and have just one left up North. Fortunately 😂 there'll be no CGT when I sell that one.
Difficult to know who's strategy was better. Best not to think too hard. Her accountant has told her she's got to start spending a lot more unless she wants the adenoidal dalek to snatch it in IHT. The challenge is, we are running out of holiday time.