Jeremy Hunt has unveiled a significant shake-up of property-related taxes in the latest Spring Budget. The overhaul aims to streamline tax rates and remove certain reliefs, promising to stir the pot in the real estate market. Here’s a breakdown of what these changes mean for landlords, investors, and the average UK resident looking for a place to call home.

Capital Gains Tax Gets a Trim

One of the standout announcements is the reduction of the capital gains tax (CGT) rate on residential property for higher rate taxpayers. Previously set at a hefty 28%, this tax will be pared down to 24%. This change targets non-permanent residences like buy-to-let properties, second homes, and holiday lets, which are typically subject to higher CGT rates than other assets like stocks and shares.

For those unfamiliar, CGT is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value. It’s the gain you make that’s taxed, not the amount of money you receive. The idea behind this tax cut is straightforward: by reducing the tax burden on property sales, the government anticipates a boost in the number of transactions, which could, in turn, generate more revenue.

However, it’s not all good news for everyone; basic rate taxpayers will not see any change in their CGT rate, which remains at 18%.

Farewell to Furnished Holiday Let Relief

Another major pivot is the upcoming abolition of the tax relief regime for furnished holiday lets (FHLs), slated for April 2025. This regime currently offers a basket of tax advantages to landlords who rent out their properties as holiday homes, including the ability to deduct mortgage interest payments from rental income. This not only reduces taxable income but also potentially lowers the CGT due when these properties are sold.

The Chancellor’s rationale for axing this relief is its perceived impact on the availability of long-term rentals. With around 127,000 properties in the UK currently benefiting from this scheme, its removal is expected to nudge more properties back into the long-term rental or sales markets.

The Implications for Landlords and Investors

This budgetary pivot could be seen as a continuation of efforts to discourage private landlords from the rental market. Many have already migrated to the holiday let sector to sidestep the phased withdrawal of mortgage interest relief on residential lets. The dual blow of losing FHL benefits and the enticement to sell properties at a lower CGT rate could result in a surge of properties being sold off.

Interestingly, landlords operating through limited companies will dodge these changes, as the new rules do not apply to them. Overall, the government projects that these combined policies will bolster the treasury by £600 million by the 2028-29 fiscal year.

Mixed Reactions from the Experts

The response to these changes has been mixed. Some experts view the CGT cut as a missed opportunity to align CGT more closely with income tax rates, highlighting the continued disparity in treatment between property and other asset classes. Property investments now require a higher capital growth to match the post-tax returns of alternatives like stock portfolios.

The scrapping of FHL relief, meanwhile, has sparked concerns over its popularity among core supporters of the governing party. Financial analysts predict substantial financial losses for average FHLs, which could, in turn, shrink the holiday let market and affect local tourism. However, this could be a silver lining for locals in tourist-heavy areas, potentially easing the way for them to afford homes in their own communities.