Property and Capital Gains Tax: What You Need to Know

To paraphrase Benjamin Franklin, there’s nothing certain but death and taxes.

Capital Gains Tax (CGT) is a recurring topic in our blogs and with good reason. All property investors will, at some point, look to sell some or all of their properties, and that’s when CGT becomes a very real issue.

CGT has always proved to be one of the most popular topics for us to write about, and although we have touched on changes to CGT which will affect property investors, we felt it was time to create a concise guide to the subject.

Disclaimer! We are buy-to-let property professionals, we are not tax accountants, so while we have done our best to ensure the accuracy of what follows, we urge you to speak to your accountant about CGT and all other tax matters.

So, what is the relationship between property and capital gains tax, how has CGT it changed and how do these changes affect your journey as a property investor?

Capital Gains Tax

Capital Gains Tax is paid to the exchequer on the profits realised when an asset is sold. There are exceptions; you do not pay CGT if you are selling the property you live in, but if you sell a property you have bought to rent, CGT will be due.

Since many property investors, especially smaller investors with maybe one or two properties, are hoping to realise a sizable profit on the eventual sale of their property, this can be something of a concern – to put it mildly.

If you are expecting to use the profit from a sale to fund your retirement for instance, you need to understand how much CGT you’ll pay and how you can minimise this cost.

Recent changes to CGT

There were changes to CGT announced WHEN and we covered them in our blog ‘Capital Gains Tax Changes are Coming…’

In this blog we outlined the then-upcoming changes; changes which are now taking effect:

“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”.

The ‘allowance’ referred to is the Annual Exempt Amount or AEA, and its progressive reduction by Jeremy Hunt, the Chancellor of the Exchequer, was, and is, a serious matter for all businesses, but especially small businesses.

In any instance where the tax-exempt allowance is reduced to less than a quarter of its original value is a serious increase to the cost of doing business.

Sadly this has not been the only change property investors and landlords are facing – the reduction of allowances has proved to be a popular option for this Chancellor as it increases tax income without the public perception of tax rises.

Effects of these changes on the property investor

Since for many investors the relationship between property and capital gains tax is so significant, it’s critical to understand the impact on the property investor selling one or more properties.

This impact is clearly laid out above – as of the 2024/25 tax year you’ll be paying CGT on an additional £9,300 pounds of profit.

The exact amount will depend on several factors including the amount of profit realised and your tax status (basic or higher rate). Regardless, you’re going to face a greater tax burden that you would have a few years ago.

So what can you do?

One approach you might consider is to operate your business as a limited company. We’ve discussed this many times in the past and it is definitely a good choice for some landlords, but not necessarily all landlords.

Operating as a limited company

One of the ways to break the link between property and capital gains tax is to operate your business as a limited company.

If that’s something you’re considering, we’d recommend you have a read of our advice regarding limited companies in our blog ‘Should You Buy to Let as a Limited Company?’.

In short, if you sell assets such as property, the profits will be taxed as company profits rather than personal gain, potentially at a much lower rate.

The exact rate will depend on whether you are determined to be either a small profit company or a larger corporation. The cut-off for small profit companies is profits of £50,000, which should include most small landlords.

It’s worth remembering that although not related to CGT, the tax-free allowance on dividend income will be reduced to £500, from its original value of £2000, at the start of the 2024/25 tax year. Yes – they are out to get you!

Top Tip: We say it a lot, but having a close, working relationship with your accountant can really pay dividends (no pun intended).

Advice from the property pros

Although this is a brief overview of property and capital gains tax as it now stands, you’ll find greater detail in some of our earlier blogs – the search function is your friend!

Given that this is all about income – the government’s, not yours – don’t expect to see any favourable changes in the foreseeable future. This is the landscape that businesses now have to navigate.

That said, your accountant can ensure that you pay only what you are due to pay and hopefully ensure that you don’t pay anything you don’t have to. This is precisely why we so often advise speaking with them.

You could argue that there are greater challenges facing the private rented sector, certainly landlords throughout the UK are living under the threat of further legislation which will impact their businesses.

In summary…

Remaining upbeat, we’ll gloss over the former and accept that while they are unavoidable, taxes constitute just one of the costs of doing business, so it’s important to take property and capital gains tax into account from the start.

This is just one of the many reasons we always like to discuss the needs and circumstances of every client, new or existing. It gives us the chance to use our experience and knowledge to guide them in the best direction for them.

To learn more, drop us an email or call us, we’re always available to help you take the first steps on your property-investment journey.

Written by Chris Wood, MD & Founder of Portolio

Get in touch on 07812 164 842 or email [email protected]