How Capital Gains Tax is Changing?

Reporting Capitals Gains Tax has gone through a few changes in the last few years, one of the most recent of which is the 60-day filing requirement. For properties where the completion date was on or after October 27th 2021, your online property return must be filed, and any CGT due on the property must be completed within 60 days.

As a result, you may also be required to submit a taxable income for the year if you are a standard-rate taxpayer. While it is possible for you to amend any incorrect estimates through self-assessment at the end of the tax year, it is important to remember that there could be penalties for estimates that are greatly undervalued.

Furthermore, from the 6th of April 2024, CGT rates for residential properties in the UK have been reduced from 28% to 24% for the higher rate (while the basic rate remains the same at 18%). In turn, this means that the annual exception for Capital Gains Tax has been changed.

For the tax year 2022/2023, it was £12,300, and it has now been reduced to £6,000 for the tax year 2023/2024. It is set to be reduced further for the tax year 2024/2025 as it goes down to £3,000. This is a massive reduction, especially when paired with the fact that interest rates remain exceedingly high.

How the Change Affects Landlords

Due to the continued high interest rates, rental properties are becoming less attractive to current investors while also dissuading new investors from taking the plunge. As a result, returns are also diminished – especially since tax relief on interest paid is now restricted to the standard rate of 20% after being fully withdrawn back in 2021.

All of this combined means that additional rate taxpayers are more likely to see significantly higher tax bills due to the CGT increase. This is made worse bu the fact that the government announced the planned abolishment of the Furnished Holiday Lets (FHL) tax regime.

This regime brought multiple tax benefits, including full relief for mortgage interest, the potential for the owner to claim Business Asset Disposal Relief (BADR), and be entitled to pay 10% CGT. It also meant the let was considered as relevant earnings for pension purposes, which increased the maximum amount an individual could save into a pension.

Why This Could Cause an Increase in Second Home Sales

All of this combined means that there are some potentially serious consequences for the affected taxpayer. For example, a taxpayer who has an income in excess of £100k will now have a marginal tax rate of 60% between the amounts of £100k and £125k. If £25k of this was from rental income, the tax payable will now be impossibly high for many current landlords.

As a result, there are many landlords who might consider it a better path to sell the property and invest their money elsewhere so they can bring their income below £100k to avoid the new tax plans and the brutal CGT reductions.

For landlords who need to consider childcare bills, this is especially relevant considering the limited (or lack of) support for those when their net income is in excess of £100k. The cost of living crisis affects everyone, and while taxes and interest rates continue to grow, the price of goods and services has also been steadily increasing.

Research has shown that 25% of landlords intend to sell their rental properties before August 2024, and 32% of them claim it is due to tax increases. Combined with higher mortgage costs and the cost of living crisis, it is easy to see why we can expect an increase in the sale of second homes.

Final Thoughts

If you need assistance with submitting your property tax return or learning more about CGT and how it could affect you as a landlord, feel free to reach out to us at Property Capital Gains Tax UK. Our team of experts is on hand to help answer any questions you have and make the tax filing process easier.