Autumn Statement capital gains tax changes mean landlords pay £2,600 more when selling properties

Landlords will be hit by a capital gains tax raid from next year that will see the typical property investor lose £2,600 when selling a home that has increased in value.

In today’s Autumn Statement, the Chancellor Jeremy Hunt announced that the annual exempt amount for capital gains tax will be cut from £12,300 to £6,000 next year, and then halved again to just £3,000 from April 2024.

Landlords making more profit than that when selling properties will be taxed at a rate of 18 per cent, or 28 per cent for higher-rate taxpayers. 

Bad news for landlords: The annual exempt amount for capital gains tax (CGT) will be cut from £12,300 to £6,000 next year and then to £3,000 from April 2024

CGT is charged on any profit someone makes on an asset that has increased in value, when they come to sell it. This could be when selling a buy-to-let investment or company shares for example.

There are around 2.65million landlords in the UK, according to the latest HMRC figures, and many hold properties which have significantly risen in value during their ownership.  

The average landlord who sold this year in England and Wales sold their buy-to-let for £98,050 more than they paid for it, according to research by the estate agent Hamptons. 

After deducting 10 per cent for costs, this would leave the average higher-rate taxpayer with a £21,260 CGT tax bill.

When the threshold is reduced next year to £6,000, it will cost the average higher-rate taxpaying landlord an extra £1,770 in tax based on today’s house prices. 

From April 2024, the average higher-rate taxpaying landlord will pay £2,610 or 12 per cent more in CGT when selling.

From April 2024, the average higher-rate taxpaying landlord will pay £2,610 or 12 per cent more in CGT when selling.

From April 2024, the average higher-rate taxpaying landlord will pay £2,610 or 12 per cent more in CGT when selling.

It comes as landlords, like homeowners, are seeing substantially higher mortgage rates, and they have also had several buy-to-let tax incentives removed in recent years.  

Whilst stock market investors can protect themselves by using their Isa allowances of £20k each year, property investors are unable to shield themselves in the same way.

Furthermore, stock market investors outside of their Isa allowance can better manage their gains by selling in small chunks to take advantage of their annual allowance. With property, landlords have to realise any gain all in one go when they sell.

Area £ profit % difference Avg years owned
London £306,430 73% 10.3
South East £127,530 53% 9.6
East of England £108,310 55% 9.4
South West £88,200 48% 9.5
West Midlands £61,120 47% 9.3
East Midlands £57,710 50% 9.4
Wales £53,340 52% 9.7
North West £48,860 46% 10.0
Yorkshire & the Humber £45,310 43% 10.1
North East £23,250 28% 9.8
Eng & Wales £98,050 50% 9.7
Source: Hamptons. Profits are before costs. 

The Government made £14.3billion in CGT in the 2020/21 tax year, taking contributions from a total of 323,000 taxpayers.

The cutting of the CGT personal allowance should mean more Britons pay the tax.

However, some personal finance experts believe this could have the reverse impact, instead encouraging landlords to ‘hoard’ properties. 

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: ‘Capital gains tax is already a nightmare for landlords, who can’t stagger their gains over a number of years, so only get one shot at using their capital gains tax allowance.

‘The reduction to £6,000 and then £3,000 over the next two years is going to mean anyone selling up after this faces an even bigger bill.

Deductible: Landlords can offset the fees they pay to professionals such as estate agents and lawyers against their tax bill

Deductible: Landlords can offset the fees they pay to professionals such as estate agents and lawyers against their tax bill 

Coles adds: ‘The trouble with cutting allowances like this is that it can force landlords to hoard assets, because they know if they hang onto their property portfolio until they die, their CGT bill will be reduced to zero – so a cut in allowances ends up actually reducing the amount of tax the taxman receives.

‘The Government is likely to have staggered this reduction in an effort to give landlords time to sell up before the full impact of the changes kick in.

‘However, once the allowance is just £3,000 it may well mean landlords are increasingly wary about selling up.’

How does capital gains tax work for landlords?

On residential property, CGT is currently charged at 18 per cent for basic rate taxpayers and 28 per cent for higher rate taxpayers.

Fortunately, those selling their own home are shielded from this by what is known as principal private residence relief.

At present, landlords are only required to pay CGT if the gain they make when selling exceeds their £12,300 tax-free allowance in a single tax year. If this allowance is breached in a given tax year, they will be liable to pay it.

For example, someone selling a buy-to-let property for £200,000, having previously purchased it for £100,000, will have made a gain of £100,000. Based on the existing CGT allowance, this taxable gain reduces to £87,700.

Area Average Profit after costs 2022 (£12,300) 2023 (£6k) 2023 (£3k)
London £275,787 £73,780 £75,540 £76,380
South East £114,777 £28,690 £30,460 £31,300
East of England £97,479 £23,850 £25,610 £26,450
South West £79,380 £18,780 £20,550 £21,390
West Midlands £55,008 £11,960 £13,720 £14,560
East Midlands £51,939 £11,100 £12,860 £13,700
Wales £48,006 £10,000 £11,760 £12,600
North West £43,974 £8,870 £10,630 £11,470
Yorkshire & the Humber £40,779 £7,970 £9,740 £10,580
North East £20,925 £2,420 £4,180 £5,020
Eng & Wales £88,245 £21,260 £23,030 £23,870
Source: Hamptons. Note: Assumes landlords make use of CGT allowance and deduct 10% of gains for costs 

However as of April next year, the CGT allowance will fall to £6,000, meaning the landlord’s taxable gain will rise to £94,000. And the following year it will rise again to £97,000.

At the 28 per cent tax rate, a higher rate taxpayer with a £100,000 gain will typically see their tax bill rise from £24,556 to £26,320 from 6 April next year.

In April 2024 a landlord with a £100,000 capital gain will see their tax bill rise to £27,160. On a £100,000 capital gain, that represents £2,604 more in tax than a landlord would pay if selling today.

Top tips to save on CGT

By Natalie Field, partner accountant at TaxScouts 

1. Use your annual allowance of £12,300. It’s ‘use it or lose it’ so you can’t carry it forward to future tax years if not fully utilised

2. Most assets can be transferred tax-free to spouses or civil partners, so it may be worth transferring to the individual who pays tax at a lower rate or who has more allowance to use

3. Offset your losses against your gains. For example, you may have some underperforming shares which you can sell at a loss to then offset against gains made on your better performing investments

4. Reduce your taxable income. The rate at which you pay income tax denotes which rate you pay for capital gains tax

5. Make investments in Isas as any gains are tax-free.

6. Spread gains over several years to make the most of the yearly allowances and lower tax brackets

Basic rate taxpaying landlords will also be hit hard. This is because CGT is added to someone’s normal income to decide the tax rate it is charged at.

So, even if someone is a basic rate taxpayer, the impact of a sizeable capital gain is likely to push them into the higher rate.

For example, if someone makes a capital gain of £100,000 when selling a buy-to-let property – after their annual tax free allowance of £12,300 this gain becomes £87,700.

The basic rate tax threshold is £50,270, so if they are a basic rate taxpayer earning £30,000 a year, £20,270 of their capital gain is calculated at 18 per cent with the remaining £67,430 of the gain being taxed at 28 per cent. 

This means they lose £22,528 to the taxman, and this will now rise next year and then the year after.

The average basic rate taxpaying landlord selling in England and Wales will see their tax bill rise from £13,670 to £15,340, according to Hamptons. 

It’s important to note that there are many ways to reduce a capital gains tax bill.

For example, the costs of buying and selling the property, including stamp duty, solicitor fees, and estate agent fees can be deducted from the total gain.

So to can the costs of improvements such as an extension or a new kitchen. Just remember to keep the receipts.

How will this impact renters?

Landlords are not short of reasons to exit the market at present and this will likely serve as another disincentive for property investing.

Like homeowners, landlords are currently facing high mortgage rates. They also already pay a 3 per cent stamp duty surcharge when buying a property and are no longer able to fully offset their mortgage interest costs from their tax bill.

Chris Springett, tax partner at wealth management and professional services firm Evelyn Partners said: ‘Many second homeowners and landlords – accidental as well as buy-to-let investors – who are looking to sell a property now face a higher tax bill on the profits they have made from rising house prices. 

‘The differences in tax bills from the allowance cut for some property transactions might be relatively small in absolute terms, but it is the latest in a series of moves by the Treasury in the last decade that have dented the attractions of property as an investment.

Change in average basic rate taxpaying landlords CGT bill
Area Average Profit after costs 2022 (£12,300) 2023 (£6k) 2023 (£3k)
London £275,787 £47,430 £48,560 £49,100
South East £114,777 £18,450 £19,580 £20,120
East of England £97,479 £15,330 £16,470 £17,010
South West £79,380 £12,070 £13,210 £13,750
West Midlands £55,008 £7,690 £8,820 £9,360
East Midlands £51,939 £7,140 £8,270 £8,810
Wales £48,006 £6,430 £7,560 £8,100
North West £43,974 £5,700 £6,840 £7,380
Yorkshire & the Humber £40,779 £5,130 £6,260 £6,800
North East £20,925 £1,550 £2,690 £3,230
Eng & Wales £88,245 £13,670 £14,800 £15,340
Note: Assumes landlords make use of CGT allowance and deduct 10% of gains for costs       Credit: Hamptons 

Simon Jones, chief executive of investment website Investing Reviews, adds: ‘With borrowing costs spiking, and tax relief on mortgage interest already eroded, today’s announcement means that being a landlord is no longer a viable investment strategy for the future.

‘The conversation increasingly among existing landlords is that passive investment platforms like Isas and Sipps now provide greater returns with less hassle and fewer taxes than bricks and mortar.’

Aneisha Beveridge, head of research at Hamptons International adds: ‘Given the scale of gains made by landlords over a 10-year period, the effective tax hike will be unwelcomed, but is unlikely to change longer-term behaviour. 

‘Today’s announcement may see some landlords who were thinking of selling bring that decision forward, but that decision is far more likely to be driven by a squeeze in their profits from rising mortgage rates rather than the capital gains hike given this is only paid on profit after sale.’

Commentators are warning that if the CGT changes encourage landlords to sell up, this could inflict further pain on renters.

Jeremy Leaf, north London estate agent and a former Rics residential chairman, says: ‘Hopefully, landlords won’t sell now before this measure is introduced, as that will be bad not only for the rental market but the sales market too, as it will increase supply in the latter, reducing property prices more rapidly and therefore undermining confidence. 

‘If properties flood the market as a result, it won’t be good for sales or lettings.

‘The fact is that we need landlords; everyone knows rents are too high and there are not enough affordable homes to sell or for rent. 

‘We want to encourage landlords to stay in the sector and new ones to enter the market, reducing the upwards pressure on rents and stemming the flow of departure.’

Putting your buy-to-let in a limited company to save tax 

Another way investors can mitigate some of the tax changes is to invest via a limited company.

Under the limited company model, landlords can still obtain full mortgage interest relief and therefore reduce their tax bill.

Those owning within a limited company will pay corporation tax, at 19 per cent, considerably lower than the higher rate of income tax of 40 per cent.

This is one of the reasons why more companies have been set up to hold buy-to-lets between 2016 and 2021 than in the preceding 50 years combined.

According to agent Hamptons, there were 47,400 new buy-to-let companies incorporated in 2021 across the UK, a 14 per cent rise on the previous year.

However, limited companies don’t work for everyone.

‘Setting up a limited company tends to benefit higher-rate taxpayers or those with multiple buy-to-let properties,’ says Hamptons’ Aneisha Beveridge.

‘For landlords without a mortgage, or looking to buy in cash, the benefits of putting a property into a company are undoubtedly more marginal than for someone with a buy-to-let mortgage.

‘It all depends on individual circumstances and so it’s worth getting advice from an accountant or tax adviser before purchasing a buy-to-let.’

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