The Brand Financial Training team provides an update on the changes to CGT, the first stage of which will come in from April 2023 and looks at how this will particularly affect buy-to-let investors.
The Capital Gains Tax (CGT) annual exempt amount has always been considered quite generous…
Well, that’s set to change from next tax year, when it reduces from its current level of £12,300 to less than half of that in April 2023 (down to £6,000) before reducing again to £3,000 from April 2024.
This is the latest nail in the coffin for landlords having experienced some challenging changes already over recent years; increased regulation, additional Stamp Duty Land Tax (SDLT) and less income tax relief on mortgage interest mean that some landlords have already exited the market. The ones left may now be wondering whether to do the same thing.
Let’s consider the CGT position for a landlord considering a sale now or later:
Example
Sarah, a higher rate taxpayer, bought a buy-to-let property in 2010 for £210,000. In December 2022 it has increased in value to £312,000. Ignoring any costs she incurred in buying the property, if she were to sell it the capital gain would be:
Sale Price £312,000
Less Purchase Price (£210,000)
Gain £102,000
Less AEA (£12,300)
Chargeable Gain £89,700
As a higher-rate taxpayer, Sarah will pay CGT at the higher rate of 28%, so £25,116 if she sells now. But, if she delays the sale until 5 April 2023, she will pay £26,880 (£1,764 more) due to the reduction in the annual exempt amount.
There are several factors to consider when deciding whether to sell now or later:
- Firstly, it is only around four months until the beginning of the new tax year. Properties can take some time to sell and the conveyancing process can be slow as well. If the property does not complete by the 5th April 2023, then the CGT annual exempt amount will be the lower amount anyway.
- According to various sources, house prices are falling so the current value may be less now than it might be in a couple of years’ time when growth may outweigh the reductions in the tax-free amount we can offset against gains.
- If rents have not been increased in a while, then it may be possible to put rents up so that any future CGT is offset by the increased amount of income received.
Anyone considering entering the buy-to-let market should consider the overall taxes that they may be liable to before committing:
- In England and Northern Ireland, SDLT is paid on purchases over £40,000 charged at an additional 3% on each tier (in Wales the charge is Land Transaction Tax and in Scotland it is Land and Buildings Transaction Tax with different tiers and rates)
- Income Tax on rental income after expenses is charged at the landlord’s marginal rate, with any mortgage interest only deductible against profits at the basic-rate of 20%
- Capital Gains Tax on profits on disposal at the higher rates of 28% (for higher-rate taxpayers) and 18% (for basic-rate taxpayers) with deductions possible for the costs of buying and selling and making any improvements
There are other regulations that landlords have to comply with as well, to cover such things as electrical and gas safety which also add to annual costs.
The tax rules and regulation have changed a lot over the years and continue to do so; keeping ahead of the game is crucial for any landlord who must be prepared to run rental properties as a business to maximise returns as well as to keep on the right side of HMRC.
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