In July 2020, Rishi Sunak commissioned a report from the Office of Tax Simplification (OTS) to look at how Capital Gains Tax (CGT) is charged. This is a tax applied to the increase in the value of an asset over the time you own it and it’s one of the more complicated areas of taxation, with four different rates, depending on the type of asset you’ve invested in and whether you’re a basic or higher-rate tax payer.
Gains for most asset classes, such as shares, high-value personal possessions and business assets, are subject to a basic rate of 10% and a higher rate of 20%. However, residential property has an 8% surcharge, so that when you sell or dispose of anything other than your own main home, you pay 18% at the basic rate of tax and 28% at the higher rate.
Everyone is entitled to an ‘Annual Exempt Amount’, currently £12,300 for the 2020-21 tax year, and then CGT is charged on the gain above that tax-free allowance.
The current CGT rules for residential property
- CGT is applied to the difference between the purchase price and the sale price, or the value of the property at the point you dispose of it in another way, such as by transferring ownership, giving it away or making a claim for the full rebuild value on insurance.
- If you inherit a property, you only pay CGT when you dispose of it and, rather than being taxed on the whole gain since the property was bought, you’re simply charged on the increase in value from the point you received it. This is known as ‘CGT uplift’.
- There are two areas of relief you can claim for a rented property that has been your own home:
- Private Residence Relief (PRR): If you ever lived in a property that you currently rent out, you don’t pay CGT for the years you lived there yourself. There is then an extra exemption for the final 9 months that you owned the property, even if it was rented out during that time.
- Lettings relief: If you share the property with a tenant, you may be able to claim up to £40,000 against capital gains, on top of PRR.
- If you have CGT to pay on residential property gains, you must make a payment on account within 30 days of completion of the sale or disposal and submit your return.
What changes are being suggested?
The Chancellor asked the OTS to look into how CGT compares to other taxes and whether changes could be made to the system so that people don’t ‘distort’ their behaviour in order to take advantage of the current rates and allowances - that’s things like investors staggering the sale of properties over a number of years so they can benefit from the full annual tax-free allowance.
The OTS recently released their report and, although the Government hasn’t made any formal proposals yet, it’s been suggested that up to £14bn could be raised through making these changes. Buy to let investors and landlords have already had to deal with various changes to the rules around CGT in recent years, including a withdrawal of most of the reliefs for rented properties, so what’s now being proposed?
Here are the three key recommendations from the report that relate to property:
- CGT rates could be brought more closely in line with income tax rates.
The basic and higher rates of 18% and 28% for property are relatively low, compared with those for income tax, which are currently 20%, 40% and 45%. The standard CGT rates of 10% and 20% are even lower. If this recommendation was introduced, and especially if the Government moved to a single, flat rate for all capital gains, it could mean a much higher CGT bill for landlords when they sell.
- The Annual Exempt Amount could be reduced.
This has been recommended in an effort to address the issue of investors staggering the sale of their properties and the suggestion is that the tax-free allowance should be reduced to between £2,000 and £4,000. To compensate slightly, more personal items might be exempted, so that those with smaller profits wouldn’t have to pay CGT.
- Assets exempt from Inheritance Tax shouldn’t also benefit from CGT uplift.
The current rules greatly reduce the amount of CGT people have to pay on a property that’s been inherited. The report recommends that the entire gain (the difference between the price originally paid by the person who died and the eventual sale price) should be liable to CGT, certainly when the asset value falls below the IHT threshold.
As a landlord, it’s vital you do everything you can to protect your property investment and legally mitigate your tax liabilities. Everyone’s personal situation is different and you’ll have a variety of considerations and liabilities, depending on your own financial circumstances and whether you own property personally or via a limited company.
Any of these recommended changes could impact your profits and tax changes are rarely retrospective, so, if you don’t already use a property tax specialist, we’d suggest you take professional advice as soon as possible. Having the right advisor can make all the difference and you must make sure you’re in the best financial and legal position before any new legislation comes into force.