Whispers around Westminster suggest that landlords could be facing big tax changes in the upcoming Budget. Property experts are predicting a significant increase in Capital Gains Tax (CGT), the tax you pay on the profit when you sell a property. This could see landlords rushing to offload their properties before the new rules come into effect, potentially wiping thousands off their profits!
What is Capital Gains Tax and how much could it go up?
Capital Gains Tax (CGT) applies to the profit you make when you sell an asset that has increased in value, like a rental property. It’s the gain you make that’s taxed, not the total sale price.
For example, if you bought a property for £150,000 and sold it for £200,000, your gain would be £50,000 and that’s what you’d pay tax on.
Currently, basic-rate taxpayers pay 18% CGT on residential property, while higher and additional-rate taxpayers pay 24%.
Experts believe this rate could be hiked to 30% or even aligned with income tax rates, meaning some landlords could pay as much as 45% CGT!
How will this affect your bottom line?
While a CGT increase won’t impact your day-to-day rental income, it will significantly affect the profit you make when you eventually sell your property.
The average landlord currently makes a profit of around £100,000 when selling a buy-to-let. If the CGT rate jumps to 30%, you’d be forced to hand over an extra £6,000 to the taxman. If it rises to 45%, that figure could balloon to £16,626!
Will landlords be forced to sell up?
Faced with the prospect of losing thousands of pounds, many landlords may choose to sell their properties before the new CGT rates take effect.
Aneisha Beveridge, head of research at Hamptons estate agents, predicts: “Where we do think the budget is going to have an impact on landlords is concerning the ones who were thinking of selling their homes anyway. Faced with paying more tax, they may make the decision to bring the sale forward.”
When will the new tax hit?
The Chancellor is likely to implement the changes from next April, giving HMRC a quick cash injection and following the usual practice of announcing tax changes in the Budget and implementing them at the start of the new tax year.
Are there any other nasty surprises in store for landlords?
While the CGT hike is expected to be the main change affecting landlords, there are rumours that the government might also introduce National Insurance contributions on rental profits, similar to what self-employed people pay.
This could mean an extra 6% tax on profits up to £12,670 and 8% on profits above £50,270 per year.
There’s also talk of council tax reform, which could hit landlords letting out rooms in houses of multiple occupancy (HMOs) particularly hard.
How much profit can landlords realistically expect?
Data from Hamptons International shows that the average landlord who sold this year made a gross profit of £102,702. However, it’s important to remember that inflation plays a significant role in these gains.
In fact, a staggering 87% of the profit made by landlords who bought within the last five years can be attributed to inflation. This means your actual profit, after accounting for inflation, might be considerably less than you think.
The bottom line?
The potential changes to CGT and other taxes could have a dramatic impact on the profitability of being a landlord. Keep an eye on the upcoming Budget for any announcements and consider seeking professional advice to understand how these changes might affect your investments.