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According to new research, capital gains tax changes top the list of government legislation buy-to-let landlords want to see reversed.
Chancellor of the Exchequer Jeremy Hunt announced plans to slash the tax-free allowance by 50 per cent from April 6, leaving landlords to pay more capital gains tax (CGT) when they sell or gift a privately rented home.
And the Chancellor has already warned he will cut the allowance by a further 25 per cent in April 2024, says the mortgage lender Octane Capital study.
What is capital gains tax?
Capital gains tax - often called CGT - is a tax on the profit, or gain, on disposing of an asset, such as a buy-to-let property, which has increased in value under your ownership.
Disposal covers:
An asset or receiving compensation, like an insurance payout, if the asset is lost or destroyed.
The CGT tax-free allowance
The CGT tax-free allowance works similarly to the income tax personal allowance.
The Chancellor’s changes are to the annual exempt amount (AEA), a standard amount for everyone.
For the 2022-23 tax year, the AEA is £12,300 for each owner.
A married couple selling a home for £250,000 bought for £150,000 makes a gain of £100,000. Instead of paying CGT on the entire amount, the profit is split in half, and the AEA is deducted, leaving a gain of £50,000 each reduced by £12,300 to £37,700.
Assuming no other expenses or reliefs apply, CGT is charged at 18 per cent for basic rate (20 per cent) income taxpayers and 28 per cent for higher rate taxpayers.
CGT would be £6,714 for the lower rate taxpayer or £10,444 for a higher rate taxpayer.
For 2023-24, the AEA drops to £6,000 for each owner, although the CGT tax rates stay the same.
So, our married couple selling a £250,000 home for the same £100,000 next year pay CGT on £44,000 each.
CGT rises to £7,920 each - an increase of £1,206 for each basic rate owner, while higher rate tax paying owners each face a £12,320 CGT bill - an increase of £1,876 each.
In the 2024-25 tax year, CGT keeps rising as the AEA slashed again.
The AEA falls to £3,000, leaving a taxable gain of £47,000 for each of our owners.
CGT rises to £8,460 - another £540 increase for a basic rate taxpayer - and £13,160 for a higher rate taxpayer, £840 more than in the previous tax year.
Altogether, the cuts to AEA over the next two years will add £1,746 to a basic rate taxpayer’s CGT bill, while higher rate taxpayers will pay an extra £2,716.
Buy-to-let challenges worry landlords
Although the CGT tax changes were rated as the most significant current challenge to landlord finances, the increased cost of running a buy-to-let property was close behind. Landlords cited rising maintenance bills and energy prices as a worry.
The impact of higher mortgage interest rates was flagged as a concern by 60 per cent of landlords responding to the survey. Other issues landlords would like to see reversed include the abolition of Section 21 evictions and the improvements needed to homes to meet energy performance standards.
Octane chief executive Jonathan Samuels said: “It appears as though the exodus of landlords from the rental sector has been somewhat over exaggerated with just a small proportion opting to reduce the size of their portfolio in 2022.
“That said, while we’ve seen a degree of stability return following a shambolic mini-budget last September, many buy to let investors remain cautious about the year ahead.
“This caution is likely to prevent them from investing further until a greater degree of certainty returns, although we must also tip our hats to the government in this respect, as their consistent attack on the sector remains the number one concern.”
Find out more about CGT for landlords
HM Revenue & Customs publishes an essential CGT guide online to download for free.
For more detailed information, go to the HMRC Capital Gains manual for tax inspectors.