Amongst the speculation of the upcoming Budget, property investors and, specifically, buy-to-let landlords are anxiously waiting to hear an update surrounding Capital Gains Tax (CGT). Many anticipate a hike in the CGT rates making it increasingly expensive for those looking to sell their assets. Barrows and Forrester, a letting and estate agent, discovered that 48% of the landlords they had spoken to are concerned about the suspected increase to CGT.
What are the expected Capital Gains Tax Increases?
The Government’s Office of Tax Simplification (OTS) has recommended changes to CGT in a report put to the Chancellor in July 2020 and again in a review in November for the end of the financial year. As the March Budget fast approaches, many investors and landlords expect these suggestions to be put to fruition.
The OTS is an independent adviser to the government, aiming to simplify the UK tax system. Set up in 2010, the office became a permanent independent Office by 2015. It was then placed on a statutory basis in sections 184 to 189 of the Finance Act 2016, as well as Schedule 25.
In the most recent reports, the OTS revealed a few areas where CGT is counter-intuitive and creates odd incentives. They even went as far as to argue CGT is “a barrier to economic growth” and a “barrier to a more equitable society.”
Within the document, the OTS suggested a higher rate of taxpayers selling buy-to-let or second homes would see the Government’s CGT bill soar from 28% to 40 — helping the Government recover slightly from COVID-19’s economic effect. However, this increase would cost landlords and investors thousands. Those on the basic rate would be affected less; their CGT tax bills would see a 2% increase.
Another significant reduction has been called in Annual Tax Allowance too. The OTS has recommended that the allowance should be lowered from £12,300 to £2,000. These changes to CGT see it being aligned to income tax rates, which can be as high as 45%.
Click here to read the OTS’s full report in detail.
The Affect on Landlords and Property Investors
Unfortunately, as CGT is a tax placed upon the profit of items that see a growth in value, both landlords and property investors are likely to feel the effect of any changes. But, CGT will affect you more if you choose to see your asset. In response to the proposed changes, many plan to stick with their investment and stay in the property market.
Barrow and Forrester found that 57% of the landlords in their study will stick with their investment no matter what happens. Only 13% are considering selling their asset, and 8% (less than 1 in 10) are already in the process of selling.
With landlords having to bear the brunt of the 3% stamp duty surcharge and a reduction to mortgage income tax relief, the upcoming changes to CGT are just another obstacle they must negotiate. Many are likely to adjust their focus and prioritise their annual income from their rental portfolio instead of capital growth. This realignment could see more investors turn to areas of the country where rental prices are high compared to house prices.
Yes, the CGT changes will be another factor to consider, but the rental property market can still offer an excellent annual income.