One knock-on effect of the rise in mortgage rates has been a
noticeable increase in the amount of buy-to-let properties being sold, as
landlords find their mortgages more expensive to afford and representing a
less-worthwhile return on investment. The latest available data for April & May
this year shows that as many as 25,000 rental properties were sold, compared to
22,000 for the months preceding.1
As property is sold, landlords may be liable to pay Capital
Gains Tax (CGT) if the sale of the property means that the profits exceed the
UK Government limits on what an individual can earn before taxation is due.
Recent figures from HMRC highlight a notable 20% increase in
CGT payers during the 2021-22 fiscal year. Around 394,000
individuals encountered this tax, predominantly due to sales that yielded
financial gains, such as those from a second property or investment assets.2
According to these statistics, the tax authority amassed a
staggering £16.7 billion in CGT, representing a 15% growth from the previous
record.
Over the last decade, there has been more than a double
increase in taxpayers liable for CGT. With tax-free allowances on the decline,
this pattern is set to continue.2
While CGT covers profits from assets such as shares,
secondary residences, and various other belongings, it isn’t solely the domain
of the immensely wealthy. A striking 45% of the total CGT derived from gains
exceeding £5 million. However, a substantial 214,000 individuals paid it on
gains of less than £25,000.3
Demystifying Capital Gains Tax
CGT is levied on profits made when selling an asset,
determined by subtracting the purchase price from the sale price.
Various reliefs are accessible depending on the asset type,
and there’s an annual CGT exemption for individuals. This was previously set at
£12,300 but reduced to £6,000 in 2023, with a further anticipated reduction to
£3,000 by 2024.4
For those in the higher and additional tax brackets, the CGT
rates stand at 28% for property gains and 20% for other assets. For basic rate
taxpayers, CGT rates vary between 10% and 18%, contingent upon their total
taxable income and the asset nature.
Repercussions for Buy-to-Let Landlords
Landlords must brace themselves for CGT on profits when
divesting from any property other than their primary residence. This includes
both second homes and let properties.
According to recent data, 139,000 taxpayers declared 151,000
residential property sales in the 2022/23 tax year. This led to a combined tax
liability of £1.8 billion, markedly higher than the figures from 2020/21.1
This uptick suggests an increasing number of landlords are
leaving the property market, perhaps because of more restrictive tax measures
that make buy-to-let investments less enticing.3
Several CGT reliefs are available to landlords, though they
are increasingly limited. One relief is extended to landlords who have let out
a property they previously occupied. Here, CGT is levied only on the appreciation
during their non-occupancy period. The ‘lettings relief’, however, has seen
curtailments, thus diminishing its utility for numerous landlords.5
Seek specialist advice
The world of Capital Gains Tax can be complex, however we
would recommend seeking expert advice from a qualified financial adviser before
making any decisions on the subject, whether you are considering selling a
second home or buy-to-let property, or are interested in making an investment
in property at this time.
Your home
may be repossessed if you do not keep up repayments on your mortgage.
All the information in this article is correct as of the publish
date 28th August 2023. The opinions expressed in this publication
are those of the authors. The information provided in this article, including
text, graphics and images does not, and is not intended to, substitute advice;
instead, all information, content and materials available in this article are
for general informational purposes only. Information in this article may not
constitute the most up-to-date legal or other information.
Sources
1.
The Guardian (2023) Number of landlords selling
up in UK grows as mortgage rates surge. Available at: https://www.theguardian.com/business/2023/aug/14/number-of-landlords-selling-up-in-uk-grows-mortgage-rates-surge-buy-to-let
(Accessed 22nd August 2023)
2.
UK Government (2023) Capital Gains Tax
Commentary. Available at: https://www.gov.uk/government/statistics/capital-gains-tax-statistics/capital-gains-tax-commentary–2#:~:text=The%20total%20amount%20of%20tax,all%2Dtime%20high%20of%20394%2C000.
(Accessed 22nd August 2023)
3.
Money Week (2023) Capital gains tax receipts
rise as landlords cash in on property. Available at: https://moneyweek.com/moneyweek.com/personal-finance/tax/CGT-bills-rise
(Accessed 22nd August 2023)
4.
The Times Money Mentor (2023) UK capital
gains tax rates and who pays it. Available at: https://www.thetimes.co.uk/money-mentor/article/guide-capital-gains-tax/
(Accessed 22nd August 2023)
5.
UK Government (2023) Tax when you sell your
home. Available at: https://www.gov.uk/tax-sell-home/let-out-part-of-home
(Accessed 22nd August 2023)
