Guidance for Landlords on Increasing Capital Gains Tax Payments

One knock-on effect of the rise in mortgage rates has been a noticeable increase in the amount of buy-to-let properties being sold, as landlords find their mortgages more expensive to afford and representing a less-worthwhile return on investment. Latest available data for April & May this year shows that as many as 25,000 rental properties were sold, compared to 22,000 for the months preceding.

As property is sold, landlords may be liable to pay Capital Gains Tax (CGT) if the sale of the property means that the profits exceed the UK Government limits on what an individual can earn before taxation is due.

Recent figures from HMRC highlight a notable 20% increase in CGT payers during the 2021-22 fiscal year. Around 394,000 individuals encountered this tax, predominantly due to sales that yielded financial gains, such as those from a second property or investment assets.

According to these statistics, the tax authority amassed a staggering £16.7 billion in CGT, representing a 15% growth from the previous record.

Over the last decade, there has been a significant increase in taxpayers liable for CGT. With tax-free allowances on the decline, this pattern is set to continue.

While CGT covers profits from assets such as shares, secondary residences, and various other belongings, it isn’t solely the domain of the immensely wealthy. A striking 45% of the total CGT derived from gains exceeding £5 million. However, a substantial 214,000 individuals paid it on gains of less than £25,000.

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Demystifying Capital Gains Tax

CGT is levied on profits made when selling an asset, determined by subtracting the purchase price from the sale price.

Various reliefs are accessible depending on the asset type, and there’s an annual CGT exemption for individuals. This was previously set at £12,300 but reduced to £6,000 in 2023, with a further anticipated reduction to £3,000 by 2024.

For those in the higher and additional tax brackets, the CGT rates stand at 28% for property gains and 20% for other assets. For basic rate taxpayers, CGT rates vary between 10% and 18%, contingent upon their total taxable income and the asset nature.

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Repercussions for Buy-to-Let Landlords

Landlords must brace themselves for CGT on profits when divesting from any property other than their primary residence. This includes both second homes and let properties.

According to recent data, 139,000 taxpayers declared 151,000 residential property sales in the 2022/23 tax year. This led to a combined tax liability of £1.8 billion, markedly higher than the figures from 2020/21.

This uptick suggests an increasing number of landlords are leaving the property market, perhaps because of more restrictive tax measures that make buy-to-let investments less enticing.

Several CGT reliefs are available to landlords, though they are increasingly limited. One relief is extended to landlords who have let out a property they previously occupied. Here, CGT is levied only on the appreciation during their non-occupancy period. The ‘lettings relief’, however, has seen curtailments, thus diminishing its utility for numerous landlords.

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Seek specialist advice

The world of Capital Gains Tax can be complex, however we would recommend seeking expert advice from a qualified financial adviser before making any decisions on the subject, whether you are considering selling a second home or buy-to-let property, or are interested in making an investment in property at this time.

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Your home may be repossessed if you do not keep up repayments on your mortgage.

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