UK landlords looking to sell their properties might find themselves forking out more in taxes, despite recent announcements in the Budget that seemed to promise relief.
Jeremy Hunt, in his latest Budget speech, unveiled what was initially seen as a boon for landlords – a reduction in the rate of Capital Gains Tax (CGT) for those selling second homes. However, the devil, as they say, is in the details. According to analysis from estate agent Hamptons, a combination of policy changes means that, in reality, most landlords will end up paying more.
What’s Changed with CGT?
Capital Gains Tax is what you pay on the profit from selling something (in this case, property) that’s increased in value. It’s not the total amount you receive, but the gain you make that’s taxed.
- The Personal Allowance Cut: This is the amount you can earn from your gain before you start paying CGT. It was £12,300 but got halved to £6,000 last April. From this April, it’s taking another hit, dropping to a mere £3,000.
- The Rate Reduction: For higher-rate taxpayers, the CGT rate on the sale of second homes has been cut from 28% to 24%. Sounds good? Well, the rate for basic rate taxpayers remains unchanged at 18%. But when you factor in the slashed personal allowance, the picture gets a bit grimmer.
The Impact on Landlords
Hamptons’ crunching of numbers reveals a stark reality:
- Higher-Rate Taxpayers: While a reduction in CGT rate might save you £3,800 on average, the slashed personal allowance could add around £454 (or about 4%) to your tax bill.
- Basic-Rate Taxpayers: You’re not spared either. Expect your CGT bill to increase by £1,674 on average from April.
The bottom line? An overwhelming 89% of higher-rate taxpayer landlords selling their property will see their CGT bill rise by an average of £454. And every lower-rate taxpayer landlord will feel the pinch too, facing an increase in their CGT bill.
Who Really Wins?
Aneisha Beveridge from Hamptons points out that the overall impact of these changes hinges on your asset wealth. If you’re a higher-rate taxpayer with gains under £68,000, you’re likely worse off. On the flip side, those with larger gains might see some benefit. However, given that the average landlord made a gross gain of £110,000 in 2023, it seems most landlords will end up paying more tax if they decide to sell.
A Closer Look at Who’s Hit Hardest
The changes seem to disproportionately affect newer, millennial investors and those selling less expensive properties in cheaper areas. These groups typically see smaller gains and, therefore, will feel the sting of the increased tax burden more acutely. Conversely, seasoned landlords who’ve seen substantial property price growth over the years might still come out ahead, despite the changes.
A Silver Lining for Some
Interestingly, Beveridge notes that many landlords operating through limited companies won’t be impacted by these CGT changes. Instead of CGT, these landlords pay corporation tax on their sale proceeds. With a record number of limited buy-to-let companies set up last year, it’s clear that some investors are finding ways to navigate the shifting tax landscape.
Housing Market Impact
The Chancellor’s intention behind tweaking CGT was to rejuvenate the housing market by encouraging landlords to sell, potentially making more properties available for first-time buyers. However, the overall changes to CGT, particularly the cut in the personal allowance, might actually deter landlords from selling. This could lead to fewer properties on the market, not more, potentially frustrating efforts to help new buyers onto the property ladder.