Throughout 2020, tax investors and regular individuals on the street have had to deal with finding new ways to manage their finances. The world has changed in many ways and a new normal is something all of us have had to adapt to. Borrowing by the government has reached a new high during peacetime days with the need for raising taxes or spending cuts to come as we move forward into 2021.
Various experts believe that property tax changes are coming soon. It's believed that those involved in property investment will learn more about what changes are happening as we move closer to the Spring Budget. This will likely occur toward the end of the first quarter of the new year. This may be only the beginning of a sweep of changes to look for as we move into a new year.
Also, there have been conversations about overhauling capital gains taxes and implementing a one-off tax on assets, which includes property. Many people involved in property investment are currently wondering whether these tax changes will create changes in the way they operate. That remains to be seen but it something to watch for as time passes.
Increases in Capital Gains Tax
As of July 2020, the Office for Tax Simplification was asked to look at the capital gains tax and whether it needs changes implemented or can be simplified. A report that followed showed that an increase in the capital gains tax could be coming to bring it in line with income tax rates while reducing the annual allowance available.
Right now, the capital gains rate is lower than the income tax. It's recommended that the tax rate on buy-to-let properties rise to 20% for typical rate taxpayers and 40% for high rate taxpayers. Currently, the annual allowance from this tax is £12,300 and there are recommendations that it be lowered to £2,000 instead.
If these things occur, it will have an impact on what the best taxable investment is. Second homeowners and buy-to-let property owners will feel the largest impact of this potential change. On the other hand, it could lead to a larger number of properties for sale in the time before the changes occur.
One Time Wealth Tax Proposal
For individuals who have assets of over £500,000 and couples with assets that exceed £1,000,000, the Wealth Tax Commission has proposed a single one-time tax rather than increasing VAT or income tax. The Commission currently believes that this should include both pension pots and main residences.
Taking 1% of the assets would create about £260,000,000,000 over the next five years. However, some people have worries that this would target the houses of those who have lots of assets but may not have a large amount of cash. Others believe that pension pots and main residences should not be included in any wealth tax. It's too early to tell how this will pan out but it's something to keep an eye on as we move into 2021.
Changes to Stamp Duty
The current stamp duty holiday is expected to end on the last day of March. The holiday has so far boosted the property market to help it recover from the pandemic. This has created a record number of sales and purchases at this time of year. It has also created delays in property transactions with lenders and conveyancers under more pressure than ever.
Lots of people interested in smart property investment are working to convince the government to extend the stamp duty holiday for another six months. Other changes to the duty will begin in April 2021, as non-UK investors will be required to pay an extra 2% in stamp duty. Some believe this will deter foreign investors, but others disagree since the pound is at a serious low.
How Property Investors Can Adapt to Changes
Assuming the property tax changes we've mentioned go into effect in 2021, property investors and landlords will need to make changes to the way they operate. Recently, many of these individuals have experienced the need to make changes. This includes adapting to various tax changes, including the significant changes to Section 24.
The reality is that the industry, as a whole, will continue to create ways to adapt to any property tax changes that are coming in the next year. For example, if the capital gains tax comes under major changes, property investors will likely keep hold of their investments for a longer period.
While we can't say with 100% surety what the year 2021 will bring, many property investors and landlords in the UK are keeping careful track of the changes and how they will be impacted by them. If you're involved in the industry, keep in mind what is already happening or likely to happen. But it also won't hurt to keep abreast of new decisions and expert opinions that come out between now and the start of 2021.
Need help with tax advice or accountancy services for yourself of your business? Lawrence Grant is here to help you with everything from personal tax planning to enterprise investment schemes. Reach out to us and one of our professional employees will talk with you about your options!