February 22, 2023
It must seem to landlords that they can’t move without someone, usually governments, having a go at them. This time it’s capital gains tax (CGT) changes; and for landlords, and many others, you’ll need to know how this will affect you.
The last quarter of 2022 saw a remarkable degree of financial turmoil, starting with the ill-fated ‘mini budget’ and then its almost complete reversal by Jeremy Hunt when he became Chancellor of the Exchequer.
However it was the new Chancellor’s Autumn Statement which introduced a number of far reaching-changes which could have a marked effect on the buy-to-let market.
The reduction of the CGT annual exempt amount (AEA) from £12,300 to £6000 for the 2023/2024 tax year is a dramatic change, and there is worse to come.
As property pros with many years experience in the sector, we’re going to examine how this will affect landlords and whether or not this might be the tip of the tax iceberg.
Capital gains tax? What’s that?
Just in case you missed it, capital gains tax is paid upon the profit (gain) when you sell an asset. As you’d expect, the Government’s website has an excellent description of what it is and how it’s applied.
You wouldn’t normally pay CGT on the sale of a property, providing that it is your main home. If, however, it’s a property which you rent out, or a second home, you will have to pay CGT on any profit you make when selling.
It is this which means that the forthcoming changes could have a decidedly negative impact on the private rented sector where many landlords view their property ultimately as part of their pension provision.
For them, the current and future changes to the CGT AEA may have a serious impact on their financial plans. We recently looked at the impact of tax on landlords with our blog entitled: ‘The Importance of Understanding Tax When Buying or Selling Property’.
What are the capital gains tax changes, and why?
As outlined in the introduction, the current allowance of £12,300 is set to be more than halved in the 2023/24 tax year to £6000, and then halved again in 2024/25 to £3000.
The government has indicated that this lower level is where the allowance will remain, so in two years’ time, you will pay CGT on an additional £9,300 of profit. Assuming you’re a basic rate tax payer, that’s £1,674.
That’s the what, the why is easier. We are not going to get into the morass that is government finance, suffice it to say the current administration has decided that it has to increase its income substantially.
Since raising taxes is never popular, and this is especially true for a Conservative government, reducing allowances achieves a similar result while allowing the fig leaf of ‘no change to rates’ to cling on.
The lower allowances are, the more of your income or gains (or both) you have to pay tax on and the higher government revenues become. As the annoying meerkat is fond of saying: “simples”.
CGT and buy-to-let Limited Companies
PropertyInvestmentsUK have an excellent summary of the position regarding buy-to-let properties owned by a limited company;
“Buy to let landlords who own their property or properties through a limited company do not have to pay Capital Gains Tax when selling them. Instead they pay Corporation Tax on the profits of their limited company.
Owning a property through a limited company can be a way of saving on Capital Gains Tax. Currently the higher rate of CGT is 28% but Corporation Tax is only 19% so it often makes sense to take this approach.”
Despite changes on dividend allowances announced at the same time in the Autumn Statement, it may be that more landlords will choose to order their business as a limited company in future.
Will this kill the buy-to-let market?
It’s undoubtedly another obstacle in the path of those wishing to invest in buy-to-let properties, but is it sufficient to kill the market? No, it isn’t, for a number of reasons.
The capital gains tax changes will only affect landlords when they come to sell rental properties and may only be a major consideration for those who might be counting on the profit to constitute a substantial part of their pension pot.
For those who are considering investing in the private rented sector, but haven’t yet committed, the effects of this change are far down the road, and moreover, may be reversed by subsequent governments, regardless of hue.
Finally, we simply do not know what might come down the pipe. One year ago there was no indication that there was a rent/eviction freeze coming from the Scottish Government, but come it did.
Something similar may happen in the future, or, shockingly, landlords may find themselves getting a break. The truth is it’s almost impossible to tell.
That said, the changes have generated much click-bait about potential ‘fire sales’ of rental properties; This is Money has a more measured article on the subject, although it focuses on properties south of the border.
Advice from the property pros
While any change which affects the profitability in the buy-to-let market is unwelcome, the change to capital gains tax is not specifically aimed at landlords and the pain will spread far beyond the PRS.
We would expect investors to carry on investing; they have coped with the rise in interest rates and they’ll cope with this as well. The capital gains tax changes just emphasise how important it is to have your tax affairs properly managed.
Doing so will ensure that while you cannot avoid the changes, you will minimise their effects as far as legally possible.
The fact is that this is just another burden being added to the shoulders of the PRS. It has survived others and it will survive this, it is too important to the housing market not to.
It will inevitably move some landlords to sell up, but of itself it will not sound the death knell of the sector, no matter how often this is predicted. Millions of people in the UK depend on the rented sector to provide their homes.
It will continue to do so.
In summary…
Hopefully you’ve found this article useful. Now more than ever it is a good idea to be sure that you fully understand all the pros and cons before you invest in the buy-to-let property market.
As professionals with many years of experience, we are always happy to meet with you to discuss the market in general, and your needs and expectations in particular.
Our speciality is the sale of tenanted properties so that you can begin your property journey and start earning from day one. Want to know more? Just pick up your phone and give us a call!
Written by Chris Wood, MD & Founder of Portolio
Get in touch on 07812 164 842 or email chris@portolio-user
Comments