Corporation tax vs. income and capital gains tax
The overview compares corporation tax, which applies to company profits, with income and capital gains tax, which are imposed on individual earnings and property sales
When you sell or transfer ownership of a residential property that’s not your own home, any increase in value over the time you’ve owned it is potentially liable to Capital Gains Tax (CGT).
It’s important to note that the ‘gain’ is defined as the difference between the purchase price and the sale price (or current market value) – it’s not the amount of equity you’re left with after the sale.
So, if you’re considering remortgaging and increasing your borrowing, it’s advisable to leave enough equity in the property to at least cover any capital gains tax bill in case you need to sell.
As with Income Tax, you have an annual personal tax-free allowance, currently £6,000 – reduced from £12,300 for the 2023/4 tax year. However, this allowance will be reduced again from 6 April for the 2024/5 tax year, falling to £3,000.
You can also deduct the costs of buying, selling or improving your property from your gain. This includes:
Estate agents’ fees
Solicitors’ fees
Survey costs
Stamp duty
Costs of improvement works, such as a conversion, extension or major renovation
It can be tricky to work out whether some works should be classed as ‘improvements’ or if they would be viewed more as general maintenance costs. So it’s advisable to work with a property tax specialist who can make sure you include all the deductions you’re entitled to and ensure you declare the correct level of gains.
As with income, any capital gains you pay will include other money you have earned through assets such as shares or dividends rising in value.
CGT rates:
If you’re a higher or additional rate tax payer, CGT is currently charged at 28%. However, as was announced in the Spring Budget, this will be reducing to 24% from 6 April for the 2024/5 tax year.
This is a welcome change and should help those paying tax at the higher rate offset the reduction in the personal tax-free allowance. As a simplified example, if you had a £100,000 net gain:
Selling in the 2023/4 tax year, with a personal allowance of £6,000 and a CGT rate of 28%:
£94,000 x 28% = a CGT bill of £26,320
Selling in the 2024/5 tax year, with a personal allowance of £3,000 if the CGT rate were still 28%:
£97,000 x 28% = a CGT bill of £27,160
Selling in the 2024/5 tax year with the reduction in CGT:
£97,000 x 24% = a CGT bill of £23,280
If you pay Income Tax at the basic rate, the calculation is a little more complicated. Your taxable capital gains (less your personal allowance) will be added to your taxable income. If this total falls within the basic rate Income Tax band, you’ll pay 18% CGT. Any amount above the basic rate band will now be charged at 248% from 6 April.
If you once lived in the property that you currently let, you’re entitled to Private Residence Relief.
This essentially means you don’t pay CGT for the years you lived there yourself, plus the final nine months that you owned the property, even if it was let during that time.
The relief is calculated on a percentage basis, for example:
You owned the property for 12 years - lived in it yourself for the first five years, then let it out
Five years, nine months is 48% of 12 years
Your gain over the 12 years was £100,000
You get PRR on 48% of the gain, so 52% (£52,000) is liable to CGT
And if you shared the home with your tenants – i.e. you were a ‘live-in’ landlord – you may be able to claim up to £40,000 against capital gains.
These gains are, of course, subject to allowable deductions and the annual exempt amount.
Again, working out relief can be a complicated calculation, so it’s best to seek professional tax advice.
A separate CGT return must be submitted and payment for any tax owed must be paid within 60 days of completing the sale.
Businesses are taxed differently to individuals. Instead of income tax and Capital Gains Tax , they pay Corporation Tax on trading profits, investment profits and gains from selling assets.
The rate of corporation tax currently stands at 25% for companies with profits above £250,000. Those with profits of £50,000 or less pay 19%, while profits between those two figures will be taxed at a graduated rate.
If you choose to let property via a limited company rather than as a private individual, you have to register for Corporation Tax, prepare and file a Company Tax Return and either pay Corporation Tax or report that you have none to pay.
You also have to file statutory accounts with Companies House, along with an annual Confirmation Statement.