The recent Budget statement in March 2024 included some good news for landlords.
The reduction the chancellor announced in the higher Capital Gains Tax (CGT) rate for selling investment and buy-to-let (BTL) properties means that being a landlord could now be more tax-efficient.
However, it is important to set that against another change to CGT that was flagged up in the 2023/24 Budget and which has come into effect in the 2024/25 tax year.
Read on to find out more about these two key changes to CGT and what they could mean if you have a property portfolio or are thinking of establishing one.
You pay Capital Gains Tax on the profit from the sale of assets
CGT is paid on the profit you make when you sell an asset that has increased in value.
The one main exception to this is your main residence, because Private Residence Relief means that the profit you make on the sale of your main home is free from CGT.
When you sell any other residential property you own, however, you may be liable for CGT on some or all of the profit you make.
The higher-rate Capital Gains Tax charge on the sale of second properties has fallen to 24%
In his 2024 Budget statement, the chancellor announced a reduction in the CGT rate you could be liable for when selling a rental property.
The rate at which you pay CGT following the sale of a BTL property depends on your total taxable income.
If you are a basic-rate taxpayer with an income of £50,270 or less, the CGT rate is 18%. The lower rate will remain at 18% for any gains that fall within your basic-rate band.
Crucially, though, the chancellor has reduced the CGT rate on BTL property for higher- and additional-rate taxpayers from 28% to 24%. In theory, this could result in a substantial saving.
According to figures quoted in the Telegraph, if you are a higher-rate taxpayer making a gain of £100,000 on the sale of a residential property, you will save between £3,269 and £3,880, subject to your total earnings.
On the face of it, this reduction in the rate of CGT you may be liable for would appear to be good news.
However, this needs to be set against the reduction in the total gains you can make during a tax year before CGT is due.
The Capital Gains Tax Annual Exempt Amount has been reduced to £3,000
In the 2022/23 tax year, the amount you could earn in gains before CGT might be due, known as your “Annual Exempt Amount”, was £12,300.
In April 2023, this was reduced to £6,000, and in the 2024/25 tax year, it has been reduced further to just £3,000.
Consequently, you can now only make £3,000 of profit before you are liable for CGT. It means you will likely pay tax on more of the profit you make, albeit now at a lower rate if you are a higher- or additional-rate taxpayer selling BTL property.
Indeed, Hamptons estate agents have estimated that nearly 90% of landlords who are higher or additional-rate taxpayers will pay more CGT when selling property.
These changes highlight the importance of planning ahead
Clearly, the changes announced by the chancellor provide mixed news for landlords, and there is an element of “give with one hand, take with the other” regarding the changes to CGT.
The potential increase in the amount of CGT you may be liable for makes careful planning to minimise the tax implications of selling a property that is not your main residence highly important.
For example, you can deduct the costs of some expenditure from any gains. These include any costs related to the sale, such as solicitors and estate agent fees.
You also may be able to deduct the cost of any major improvement works such as an extension or loft conversion.
Furthermore, as CGT only applies to the sale of residential properties owned by individuals, you may want to consider setting up a limited company to manage your property portfolio and potentially reduce the amount of tax you have to pay when you sell a property.
Profits made selling properties through a limited company are covered by Corporation Tax, currently set at 19% for a profit of £50,000 or less, which is more attractive when compared to the higher rate of CGT.
In each case, seeking expert advice could help you identify steps that are appropriate for you.
Get in touch
If you would like advice about your financial planning, then please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning or buy-to-let (pure) and commercial mortgages.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
