Buy-to-let landlords planning to sell up have been handed a tax cut by the Chancellor today.
In the Budget, Jeremy Hunt announced the rate of capital gains tax (CGT) charged on the sale of second homes will be slashed.
He revealed that from 6 April, the Government will cut the CGT rate for higher rate taxpayers from 28 per cent to 24 per cent.
The rate for basic rate taxpayers will remain unchanged at 18 per cent.
CGT is charged on the profit landlords and second homeowners make on a property that has increased in value when they come to sell it.
Slashed for landlords: Capital gains tax (CGT) can be charged on any profit someone makes on an asset that has increased in value, when they come to sell it
It brings the higher rate band for CGT on property closer to the level charged on other investments.
For investments such as stocks and shares, higher rate and additional rate taxpayers pay 20 per cent while basic rate taxpayers pay 10 per cent.
Hunt said the change to CGT has been made to support the housing market.
He believes it will encourage more landlords and second home owners to sell their properties, making more properties available for buyers including those looking to get on the housing ladder for the first time, while also raising tax revenue.
Nicky Stevenson, managing director at national estate agent group Fine & Country said: ‘Reducing the higher rate of capital gains tax should inject some extra energy into the housing market by increasing the number of properties for sale.
‘Teetering landlords unsure about whether to take the plunge and sell their property will be encouraged by this announcement.
‘This should offer hope for first-time buyers who are the foundation of the property market, but have been hit particularly hard by high interest rates.’
Buy-to-let boost: Jeremy Hunt announced the rate of capital gains tax (CGT) charged on the sale of second homes will be slashed
Not everyone agrees it will have the desired effect, however.
Jeremy Leaf, north London estate agent and a former residential chairman of the Royal Institution of Chartered Surveyors, said: ‘Is there going to be a flurry of sales from landlords because they will make a saving on capital gains tax? No, they are in it for long-term gain, capital appreciation combined with income yield.
‘Of course, that yield has been hit hard with higher interest rates and more regulation, as well as the inability to offset mortgage interest – but professional landlords are committed and not going to start selling because of a slight reduction in CGT.
‘Perhaps, with rents so high, the last thing we need is a reduction in homes to rent.’
How much tax will landlords save?
At present, Britons are only required to pay CGT if the gain they make exceeds their £6,000 tax-free allowance in a single tax year. If this allowance is breached, they will be liable to pay it.
However, from the start of the next tax year, which begins 6 April, this annual tax-free allowance will fall to £3,000 each year.
With property gains often far in excess of these annual allowances, most landlords will almost always end up paying CGT unless they are able to offset sufficient property related expenses, such as the costs of conveyancing, surveys and stamp duty.
This means this new cut to CGT by Hunt could result in thousands of pounds of savings for landlords when they sell.
Previously, someone selling a buy-to-let property for £300,000, having previously purchased it for £200,000, will have made a gain of £100,000. After their annual allowance, this taxable gain would have fallen to £94,000.
From 6 April, their taxable gain will rise to £97,000 – after the annual allowance is cut to £3,000. That is if they have not already breached their annual allowance by other means, such as the sale of shares outside of an Isa.
Before today’s announcement, a higher rate taxpaying landlord charged at 28 per cent on a £97,000 gain would have paid £27,160 in CGT.
Now, the equivalent landlord would pay £23,280, equivalent to a £3,880 saving.
| Total gain | Minus CGT alllowance | Taxed at 28% CGT | Taxed at 24% CGT | Total saving from 6 April |
|---|---|---|---|---|
| £50,000 | £47,000 | £13,160 | £11,280 | £1,180 |
| £100,000 | £97,000 | £27,160 | £23,280 | £3,880 |
| £200,000 | £197,000 | £55,160 | £47,280 | £7,880 |
| £300,000 | £297,000 | £83,160 | £71,280 | £11,880 |
| £400,000 | £397,000 | £111,160 | £95,280 | £15,880 |
| £500,000 | £497,000 | £139,160 | £119,280 | £19,880 |
| £1000,000 | £997,000 | £279,160 | £239,280 | £39,880 |
Why most landlords pay the higher rate of CGT
CGT is added to someone’s normal income to decide the tax rate it is charged at.
So, even if someone is a basic rate taxpayer, the impact of a sizeable capital gain is likely to push them into the higher rate.
For example, if someone makes a capital gain of £100,000 when selling a buy-to-let property – after their annual tax free allowance of £3,000 this gain becomes £97,000.
The basic rate tax threshold is £50,270, so if they are a basic rate taxpayer earning £30,000 a year, £20,270 of their capital gain will be calculated at 18 per cent with the remaining £76,730 of the gain being taxed at 24 per cent.
CGT won’t impact homeowners, unless they have let out their home in the past.
This is because when selling a main home, people are entirely shielded from CGT by what is known as principal private residence relief.
It could potentially impact homeowners who have had multiple lodgers during their tenure or have let out their home entirely for a period of time – although certain reliefs do apply.
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