Landlords could see capital gains tax bill jump by £15k per property under Labour

The latest research London lettings and estate agent, Benham and Reeves, has revealed that rumoured changes to capital gains tax in the upcoming Autumn Budget could see the average landlord hit by a £15,000 increase in the capital gains tax owed on the average buy-to-let property.

Benham and Reeves analysed the current level of capital gains tax paid by landlords at current tax thresholds and how this could change if these thresholds are brought into line with income tax.

With the average landlord remaining in the buy-to-let sector for a decade, those considering an exit today would have seen the value of their investment increase by £107,419 per property.

This equates to a profit of £99,052*per property after accounting for buying costs such as stamp duty, selling costs such as estate agent fees, as well as the legal fees required at both ends of the investment.

This, of course, differs by region, with the research by Benham and Reeves showing that London landlords will have seen the largest profit generated per property over the last 10 years at £114,342.

As a result, the average landlord across England exiting today would pay capital gains tax to the tune of £17,289 per property at the basic rate of 18% or £23,053 at the higher rate of 24%.

However, the new Labour government is widely expected to announce changes to capital gains legislation in the upcoming Autumn Budget on 30th October in order to bring in more money to fund public services.
While we don’t know for sure what the changes will be, we could see capital gains tax thresholds pulled into line with current income tax rules.

This would mean that landlords who fall into the higher rate of tax would be facing a capital gains tax bill of 40% – 16% higher than the current tax threshold.

This would mean that should these changes come into force, those looking to exit the sector would be hit with a capital gains tax bill to the tune of £38,421 – £15,368 more than they would currently pay. The increase for those at the basic rate is more marginal at £1,921.

It’s no surprise that, even at current thresholds, more and more landlords are using limited companies to manage their buy-to-let portfolios – This is due to the fact that CGT only applies to the sale of residential properties owned by individuals and by converting to a limited company, landlords would only pay corporation tax to the tune of 19% versus the 24% CGT rate currently charged to higher rate taxpayers.

Should the CGT rate increase to 40% in line with higher rate income tax, it would no doubt cause many landlords to adjust the structure of their portfolio in search of more favourable tax conditions.

Director of Benham and Reeves, Marc von Grundherr, commented

“Buy-to-let landlords have been targeted by a number of laws and legislative changes over recent years, all designed to reduce the profitability and tempt more landlords to quit the sector, thus, in theory, freeing up more stock for owner-occupier homebuyers.
Whilst these changes have certainly caused some landlords to call time on their investment, it’s perhaps a tad over enthusiastic to describe this trend as a mass exodus, and many landlords continue to see buy-to-let investment as an extremely worthwhile endeavour, with many more pivoting to limited company status in order to streamline their tax affairs.
However, our new Labour government has made it very clear which side of the fence they wish to sit, first with the introduction of the Right to Rent bill, with it looking likely that further tax hikes are on the way in the Autumn Statement.
It remains to be seen just what these tax changes will entail but any further attack on landlords is only likely to see private rental stock levels reduce further, exacerbating the rental crisis in the process and driving rents ever higher at the expense of tenants.”