As a result of tax changes announced in the previous Autumn statement, from April 2023, landlords selling a property will be required to pay much more in capital gains tax (CGT).
What is Capital Gains Tax and when will I pay it?
If you sell a property owned personally that hasn’t been your main residence during your full period of ownership, such as the sale of a buy to let property, its likely you’ll need to pay Capital Gains Tax.
The gain is generally calculated as the difference between the purchase price and the sales price. Costs of buying, selling and improving the property can reduce the gain and there is also an annual Capital Gains Tax free exemption which can also be deducted, if not used elsewhere.
A higher rate tax payer will pay 28% on any gains from residential property whilst those on a basic tax payer rate will see the rate change depending on the size of the gain (between 18-28%).
What are the changes to Capital Gains Tax?
Whilst previously this has been an annual amount of £12,300, changes to the Capital Gains Tax threshold announced in the Autumn Budget 2022 will see the current annual exemption amount go from £12,300 mentioned to £6,000 from April 2023. It will then be reduced to only £3,000 from April 2024.
Where a property is jointly owned, this means that you could lose £18,600 in tax free allowance between each of you by April 2024, resulting in approximately £5,000 of additional capital taxes due if you are a higher rate tax payer.
What are the benefits of riding out the current uncertainty and not selling?
Given the uncertainty of the property market and the current economic conditions, some landlords may prefer to keep their properties rather than sell them.
Something I talk about a lot is the serious shortage of available rental properties on the market whilst the demand for them increases nationwide and the upward effect this is having on rents. Rightmove stats confirm demand is up 20% compared to last year, whilst the total number of properties to rent is down by 9%. As rising mortgage interest rates make it more difficult for first time buyers to get on the ladder, the necessity of renting is now stronger than ever. As a landlord, you can be confident that your property won’t be empty for long.
So, many landlords may benefit from NOT jumping ship too soon. With the increasing demand from tenants for homes to rent and some landlords choosing to sell up, it may be a good time to seize opportunities to acquire properties from those exiting the market rather than sell and be hit with a larger Capital gains tax bill.
When it comes to property investing, I’m all about understanding your long-term strategy. If you have a plan to remain in the buy–to-let market long term, then riding out the uncertainty would be the best idea. This in fact could be a good opportunity to do some planning in terms of how you hold your investment, whether they can be better managed in another vehicle or whether it's time to consider doing some estate planning and passing down assets to your next generation.
Angharad Trueman - Managing Director