Changes to capital gains tax announced in Jeremy Hunt’s recent Autumn Statement will see the average landlord pay as much as £1,764 more if they do decide to exit the buy-to-let sector next year.
Lettings agency Benham and Reeves analysed the capital gains seen on a buy-to-let investment across each county of England over the last nine years - the average length of time a landlord owns their portfolio - as well as the current tax payable if they exit at both the basic and higher rate of tax, as well as how this differs to what they will pay once changes to the capital gains tax allowance come into force from next year.
The research shows that with the current house price across England now sitting at an average of £314,278, the average landlord has seen capital gain to the tune of £130,000 over the last nine years based on the latest available house price data from the Land Registry.
With the current capital gains allowance of £12,300, this would mean £117,704 of this £130,000 increase in property value is currently liable for CGT. As a result, the average landlord offloading their portfolio and paying the basic rate of tax would pay £21,187 in CGT today, while this figure climbs to £32,957 for those paying the higher and additional rates of tax.
However, with the capital gains allowance now changing to just £6,000 come the 2023-24 tax year, the average landlord looking to offload their portfolio would be facing a bill of £22,321 at the basic rate and £34,721 at the higher and additional rates of tax.
This means that those on the basic rate of tax will see their potential capital gains tax bill climb by £1,134, while those paying the higher and additional rates of tax will see an increase of £1,764.
When these changes come into force next year, it’s not London that will sit top where the highest capital gains tax bill is concerned, but Surrey. Landlords in the county looking to exit the market would be facing a capital gains tax bill of £38,167 at the basic rate and £59,371 at the higher and additional rates based on the capital appreciation of their investment over the last nine years.
London does rank second, however, with those paying a basic rate of tax facing a CGT bill of £36,922 when exiting the buy-to-let sector with the new changes in place, while those paying the higher and additional rates of tax will pay £57,435.
Buckinghamshire, Hertfordshire, Bath and North East Somerset, Bristol, Essex, Oxfordshire, Kent and West Sussex are also home to some of the highest capital gains tax bills of all counties in England once capital gains tax changes are implemented.
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Everyone except the corporate ones obviously
You'll own nothing and they'll be happy...
I don’t care what the government do to attempt to force us into not selling…. I am in charge, and I decide what is best for my, and my family’s finances. If EPC C comes in… I am SELLING.
100% right, Simon!
Every chance we’ll be paying 40% CGT under labour in a couple of years.
I think this is the big concern. The change in the allowance is not that great but if the tax rate matches marginal rates that becomes much more worrying. Things are certainly not going to get better, just a question of how much worse.
If the allowance is now virtually irrelevant we may speed up selling off. We were going to sell one per year, but the cost of selling more is now not so high.
I agree, the allowance is becoming more irrelevant; there’s less and less benefit in selling one per year. Sell in one go, hello retirement!
The unintended consequence of being stingy with cgt reliefs.
My thoughts exactly.. I was going to do one a year too but now it's 2 or 3
If this was their game to stop landlords selling it won't work, if the choice for me is to pay £000s to get a property up to EPC C or sell I'll pay the extra CGT
For those of us who have owned for longer it's all pretty irrelevant. The likelihood of us selling before we die is still just as unlikely today as it was last year. The loss of taper relief destroyed the concept of retirement for us years ago. The only policy Labour had at the last General Election that I strongly approved of was their CGT policy where they would restore indexation relief and then charge CGT at your marginal tax rate.
For example I paid £66500 for one of my houses in 1991. It was valued at £450000 earlier this year, so a gain of £383500. Take off a bit for expenses, Capital improvements and personal allowance so a taxable gain of around £360000 @ 28%. GCT payable £100800.
With Labour's indexation proposal the indexed value of the house is £351000 (according to Nationwide indexation calculator). So a gain of £99000 minus the same expenses, etc. A taxable gain of £75500 @ 40%. CGT payable £30200.
Without indexation or taper relief a great many long term landlords simply will not sell. Especially if they think there is a strong possibility of dying within the next 7 years. If we want to release equity we can remortgage for up to 35 years until we are 70. How many of us plan on living until we're 105?
If CGT was charged at a sensible rate far more of us would consider selling at some point and actually retiring (just like normal people expect to do). Then the government would rake in far more SDLT and VAT.
Jo - I don't know whether you hold your properties in a company or as an individual, but as someone who has spent the last 11 years dealing with the property my late mother owned when she died, I would just say don't leave your heirs a property problem. We have been to hell & back with the property left to us, made even more complicated by the fact that everything is owned jointly. No-one wants to pay more tax than they have to but I am sure of one thing, I am not leaving my kids the sort of problems I was left with.
I have been in a similar position to you, Tricia. I agree that it would be simpler for our beneficiaries to receive cash when we die. They don't want to inherit problems and tenants, really.
Mine think dad sits on his lap top watching the money roll into the bank account, might do them good to be thrown in at the deep end, I expect they would just sell everything anyway
They might not be able to manage as you can, Andrew. They might not have the skills or experience.
I think the only one that could Ellie would be my youngest daughter's partner down in Cornwall
You no best, of course, Andrew.
You do acquire skills when they become a necessity. I couldn't do anything before I had the property, and now I am a dab hand with a drill!
Jo - we are “ normal” people and I will be selling the lot, whatever the CGT and enjoying the only life we will all have, life is right now, not in the future.
Tricia - I agree. When my mother died she only had the house she lived in but all sorts of other things made matters complicated.
I do discuss things with my sons and they're all aware it's going to be messy.
The problem is the government keep changing the rules. I've been a landlord since the 1990s so have had to adapt to numerous rule changes. My biggest problem occurred when the government changed the taper relief rules. I already owned several properties by then, some individually and some jointly with my husband. We had a long term plan of selling them at some point in our 60s at one a year to work the best within the CGT rules. That plan had to be shredded in whichever year taper relief was removed. Didn't the window of opportunity for selling coincide with the 2008 credit crunch when mortgages were incredibly hard to obtain?
So the next plan was to see if any of my sons were keen on getting involved. One of them is now part owner of 4 of my BTLs. That of course well and truly stuffed up his SDLT position when he wanted to buy his own home but we're over that now.
Then we looked at incorporating the portfolio but some of the ownership was a bit messy. My ex and my son's nearly ex both had small parts of 1 or 2 properties. There was no way either would want to be involved with a limited company.
So then we looked at remortgaging a load of our existing properties to fund new purchases through a limited company. At least that does something for the IHT situation and allows me a salary to pay into a SIPP.
So now the plan is to get as much earned income as possible to pay into SIPPs (which are outside our estates) plus some life insurance to pay the IHT and to die before we're 75. My crystal ball may have gone a bit haywire at that point.
Basically it's all just beyond ridiculous. For something as important as housing the tax rules need to be consistent and long term. We shouldn't have to change strategy every few years because an MP has come up with yet another half-baked idea to rinse us even more.
OMG Jo - Don't plan to die before you're 75!
I am selling most now (just hit 60) which is about 10 years early, with the intention of keeping 3 or 4 'easy' properties. I'm taking the CGT hit in order to avoid the IHT hit & will pass the money on earlier than planned, hoping to live at least 7 years more. Overall have done pretty well over the last 20 years & I don't want to be regretting not selling in 10 years time.
The Govt have really spoilt my plans but I think it will only get worse from here on in :(
Tricia - I'm not specifically planning to but there is a strong likelihood I might. My mother died at 72, aunt at 74 and grandmother at 72.
It's a crazy tax policy that rewards the families of those whose parents die relatively young.
Flipping heck Jo and Tricia your both spring chickens as yet, I bet there's many years to go in both of you
Hi Tricia, i note your comments re leaving property to siblings with interest.
It is our intention to leave a number of rentals to our 2. The main reason for this is that once my wife and i both pass there will be no CGT on them. I am aware there could be inhertitance tax though. Without prying are you able to elaborate on some of the issues you had so we can take them into consideration.
The advice i have mentioned above was given by our "well respected" tax accountants in Glasgow.
I understand they would need to take out new mortgages in their names and pay off the existing ones assuming they will be continuing with the tenancies. Any feedback appreciated. Kind regards
More through luck than judgement, about 80% of our BTL portfolio was bought in our kids' names to fund their University education and early careers.
We have around £1 million of mortgages outstanding which will reduce our own estate's value and the £400k saved on this will just be about the same as the interest paid on it over the next 20 years which will take me to nearly 93.
That £1 million of debt also generates £60k of additional gross rental income and probably around £100k of annual capital growth.
Retaining fully funded debt into old age isn't to be feared if the gearing is low, the strategy sound and the money put to good use elsewhere, ideally beyond the clutches of the Government.
My 3 grown up children and their spouses have proven adept at managing properties and tenants.
Their biggest headache will be ensuring they get at cash in the numerous "high interest" accounts where my instant access float for repairs and tax bills is kept. Unfortunately those accounts paying 5% or thereabouts tend to limit the size of deposits in them, hence the reason this float is so widely and thinly spread.
I completed the sale on another last Friday.
Whether to sell the next - I'm unsure. The only reason not to is that I don't want to upset the lives of my tenants. The change to CGT means that there is less incentive to hold on until next year.
The original plan was to provide good quality accomodation, and never to sell. A plan to help with my retirement.
However sucessive governments have changed my plan considerably.
Matthew
The only reason not to is that I don't want to upset the lives of my tenants.
That really is the crux of it. You recognise your tenants lives would be seriously impacted by your decision to sell. Housing is fundamental to the mental and economic health of the nation. Tax policies need to recognise that and incentivise long term ownership of rental properties. Taper relief did that. In other countries there is no CGT after a certain number of years of ownership. In France it's 22 years and I believe 10 years in Germany. High rates of CGT just encourage landlords to sell after a short period of ownership or not become a landlord in the first place. Either of which is bad for tenants.
This doesn't fit Shelter's narrative does it? LLs that care - whatever next!
I'm selling regardless... Will pay my taxes and take stock from there... Enough is enough
I don’t have them worries no hope of me dying before I am 75.
Jo, that’s brilliant you care more about your Tenants than the Government.
The Government must really hate our Tenants loading the rental system with Rules and Regulatory costs driving up their rents making their renting unaffordable.
Then pretending to be their friend while robbing them as Mr M Gove said we are on their side, some Hypocrisy.
They have really loaded the costs of renting with requirements. HMO’s is a massive cost completely borne by the landlords, no a penny cost on local Authorities but they are taking millions per Borough from PRS, this is supposed to improve the quality of Housing ?.Deposit Schemes a huge cost in several ways and damage to Renting.
Last week it costs me £1’000. for tests and Certifications, so many pieces of paper/ dozens.
Last week also cost me £600. against my wishes because the Tenants wanted laminated ( it doesn’t last don’t stand up to water and transmits noise) flooring instead of the existing 60 oz Carpet £30 m2 7/8 years old that was perfectly serviceable, I shampooed it las Christmas, that excluding my work to put down take and pay to dispose of carpet, landlords time is free as usual.
When I was buying a small item in B&Q & £8.30 it asked do you want to round it up to £10. for Charity well not a penny I understand it goes to Sheltere
The costs are really sky rocketing.
I don’t pretend to know about tax with only a basic primary education. Anyway say £10m Est’ if you sell say you bought years ago for £3m so CG tax on £7m @28% = £1’960’000.00 leaves
5’040’000.00 + your £3m
= £8’040’000.00 left, then 40%
= £3’216’000.00
£4’824’000.00 leaves Bal’
more than half your Est’ gone in the wind
————- or
£10m @ 40% = £6m Bal’
So with this scenario you appear to be better off by
£1’176’000.00
Not taking int account £325k allowance or other minor reductions as I think all those are possible washed away if your Est’ is over £2m.
(the 2 taxes more than one ?).
Please enlighten me.
Michael
I agree with your figures and see CGT as being a really easy way to accidentally reduce your kids'inheritance by a further 28%!
As I said above, debt is a perfectly way to give your kids cash earlier, avoiding CGT on selling properties at all, avoiding IHT on the value of the new debt whilst retaining the mortgaged properties which continue to generate revenue and capital growth.
Any rental income not required to maintain your standard of living can be given away regularly with no need to survive 7 years to avoid IHT being payable on it.
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