In the Spring Budget, the Chancellor said he was hoping to encourage landlords to sell up and add new housing supply into the market for first-time buyers. But in reality, cutting the headline rate of capital gains tax while also lowering the tax-free thresholds will act as a disincentive to most landlords thinking about selling up. Most landlords leaving the market this year will end up paying more tax than two years ago, not less.
On its own, the capital gains tax (CGT) rate reduction (from 28% to 24%) announced by the Chancellor in the Budget will save the average higher-rate taxpaying landlord £3,800 when they sell. This is based on the average landlord selling their buy-to-let for £110,000 more than they paid for it last year (before any allowable expenses are deducted).
But this is only part of the story. Alongside these changes, the annual capital gains personal allowance is falling from £12,300 a year in 2022/23 to £6,000 in 2023/24 and to £3,000 in 2024/25. This was announced back in 2022's Autumn Statement. When the reduction to higher-rate CGT is combined with the drop in the annual capital gains allowance, it will add £454 or around 4% to the average CGT bill for a higher-rate taxpaying landlord.
This means that despite the cut to the rate, from April 2024, 89% of higher-rate taxpaying landlords selling up will pay more tax than they would have paid two years ago. The reduction in the annual allowance also means that every lower-rate taxpaying landlord will see their CGT bill rise by £1,674 on average from April.
Taken together, the impact of cutting the personal allowance by three-quarters alongside the reduction to the rates payable, is regressive. This means landlords recording the smallest gains, typically those who were wholly or mostly covered by the previous £12,300 personal allowance, will see the largest increase in bills, both in percentage and absolute terms.
Ultimately, anyone reporting gains of less than £68,000 will find themselves worse off. Typically, these are newer millennial investors who have seen less price growth, or those selling cheaper homes in less expensive parts of the country. Meanwhile, older investors who’ve been landlords for longer and have accumulated bigger gains are likely to benefit from the tax cut.
The average CGT bill for a higher-rate taxpaying landlord who’s owned for less than five years will rise by 9%. While average bills for investors in the North East, who reported the lowest capital gains last year, will rise 14%. Meanwhile, long-term higher-rate taxpaying landlords who owned for 20+ years will see a 4% or £734 fall in their average CGT bill.
On a final note, the Chancellor's changes to CGT rates only apply to higher-rate taxpaying landlords with homes in their own names. The growing number of investors with homes held in companies pay corporation tax on their sale proceeds after costs instead. While tax efficiency has been the major draw of a company structure, increasingly it's also the certainty and stability it offers. Chancellors have generally proved less likely to tinker with company tax rules than those for individuals.
