How are changes to Capital Gains Tax impacting landlords and investors?

For the first time in 15 years, the UK is now paying more in CGT than in Stamp Duty. New research looks at how the changes to CGT are impacting property investment.

Related topics:  Finance,  Landlords,  CGT
Property | Reporter
6th June 2023
To Let 733
"With rising rates, landlords are facing a great deal of strain and it may push more of them to exit the market"

The tax-free allowance for Capital Gains Tax (CGT) has been reduced from £12,300 to £6,000 and will drop further to £3,000 in 2024, so as of now, landlords and investors will have to pay more tax on property sale gains.

As landlords exited the market following increased rates and costs, CGT on the sale of 2nd homes in the UK cost investors £18bn last year, £3bn more than was paid in stamp duty. This is not the norm.

In the UK, a higher rate of Capital Gains Tax applies to property investments and changes in these rules will have a significant impact on landlords and investors who are looking to expand or reduce their portfolio. Landlords are required to pay CGT on any profit made on the value of the property since it was purchased.

The reduction in the CGT allowance could have a negative effect on the property market, leading to fewer transactions and potentially lower prices with landlords and investors taking a more conservative approach to their investments. Or when combined with increasing rates, they may avoid the property market altogether.

Finbri, a specialist property finance broker, surveyed over 1,000 UK landlords and found that 44% will sell investment properties following the interest rate rise to 4.5%. As mortgage rates continue to rise and the introduction of the Renters' Reform Bill adds pressure, more buy-to-let landlords are selling off their properties in response to the financial strain.

And as landlords look to exit the market, Finbri's survey has discovered 45% of landlords are Concerned (23%) or Strongly concerned (22%) about Capital Gains Tax allowance.

Capital Gains Tax changes in 2023

The capital gains tax allowance for the 2023/24 tax year has dropped significantly from its 2022/23 level of £12,300, with the threshold now set at £6,000 - a decrease of more than 50%. It will drop to £3,000 in 2024 - the lowest allowance in over 40 years.

The impact of CGT on investors and landlords

Finbri's survey revealed that almost half of landlords are planning to sell their investment properties after the base rate was hiked to 4.5% in May. The increased rates will see more landlords leave the market but will now have to contend with the new CGT allowances.

Figures from HM Revenue and Customs illustrate that capital gains tax receipts have risen by £3bn in the last year, whereas stamp duty has only increased by £1bn, a result of the sharp decline in the housing market.

Is CGT preventing investment in the Private Rental Sector?

The increasing pressure on landlords has caused a decrease in investment in the Private Rental Sector (PRS). This is likely to have a knock-on effect on housing affordability and availability, as fewer people are able to purchase property due to financial constraints.

This is concerning for those who rent property, as it's likely to cause rents to increase further.

Landlords are being weighed down by a mountain of other costs, such as increasing utility and insurance fees, so they may be forced to pass on these additional fees to tenants. Given the current market conditions, it's unclear how landlord investments will fare in the long term. CGT changes could have an effect on the number of individuals investing in buy-to-let properties, and this could further reduce rental market availability and affordability.

Despite landlords' concerns regarding CGT, there is optimism, as 44.66% said they believe now is a good time to invest in the property market and 45.15% think they will invest in 2023.

A spokesperson from Finbri said: "The recent introduction of the new CGT rate in April, along with the previous restriction on mortgage interest relief and the increased stamp duty rates, will have a major impact on the profitability of landlords and investors when they sell their properties.

“The private rental market plays a crucial role in the UK's housing sector by providing people who are unable to purchase properties with a place to live and landlords with an income source. However, with rising rates landlords are facing a great deal of strain and it may push more of them to exit the market.”

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