The inconvenient truth about Buy To Let profits
The continued ignorance of the media of the impact of inflation of profits made from BTL landlords in the UK.
Once again, I'm moved to write about how the media continue to produce articles which completely ignore inflation when it comes to profits made on the sale of residential property.
Stories of the exit of private landlords are now to be found almost weekly in the press, usually highlighting the profits made on sale. One such article written earlier in the year from the Financial Times can be found here. What is not described is the windfall that the taxman enjoys from these sales.
Capital Gains Tax (CGT) on the sale of assets is 20% - unless it’s the sale of property where the rate in the UK is 28% - or is it?
28% is the tax on the nominal profit, which takes no account of inflation. Inflation means that the real rate of CGT can be much higher.
Let’s assume that a property is bought for £400,000 in 2009 and sold for £700,000 in 2019, net of other expenses. A £300,000 profit results in CGT of £84,000 at 28%. However, in those ten years, inflation (CPI) amounted to 24.5% which means that in today’s money the real purchase price was £498,000 and the real profit was just £202,000.
Given that you’re paying Capital Gains of £84,000, this means that in real terms, the CGT rate is not 28% but 41.6%. Many years ago, a landlord could index the purchase price so that s/he didn’t pay tax on inflation; not today.
The last ten years have been relatively benign regarding inflation. Imagine if 6% had been compounded.