Capital Gains Tax Increase: What It Means for Property Investors

Capital Gains Tax Increase: What It Means for Property Investors

In our previous post, we discussed how Rachel Reeves announced she wouldn’t be raising Capital Gains Tax (CGT) on second homes if Labour comes into power. However, recent changes from the government have now introduced a CGT increase, leaving many property investors wondering how this will impact them.

What’s Changing with CGT?

As of 30th October 2024, the government has revised CGT rates. 

• the main rates of Capital Gains Tax that apply to assets other than residential property and carried interest from 10% and 20% to 18% and 24% respectively, for disposals made on or after 30 October 2024
• the rate of Capital Gains Tax that applies to trustees and personal representatives from 20% to 24% for disposals made on or after 30 October 2024

Impact on Property Investors

For those with second homes, rental properties, or HMOs, this increase could mean a higher tax bill when selling. Given that CGT applies to the profit made upon the sale of a property, owners may need to consider strategies for minimizing these gains or timing their sales effectively.

Potential Financial Implications

For example, an investor who purchased a property several years ago could now see a substantial difference in their tax liability. 

To illustrate the impact of the CGT increase, let’s consider an example of a property investor, Alex, who owns both residential and non-residential investment properties.

Selling a Non-Residential Property

• Purchase Price: £200,000
• Sale Price: £300,000
• Capital Gain: £100,000 (this is the profit Alex made from the sale)

Under the old CGT rate, Alex would pay 20% on this capital gain, resulting in a tax of £20,000. However, under the new rate effective 30 October 2024, the rate has increased to 24% for non-residential property.

• New CGT Calculation: £100,000 * 24% = £24,000

So, with the new rate, Alex’s CGT liability increases by £4,000, from £20,000 to £24,000. That’s a 20% rise in the amount of CGT owed, which can make a substantial difference to investment returns.

With the increased rates, landlords might feel more pressure to factor CGT into their long-term plans, especially if they’re nearing retirement or looking to liquidate assets.

Is CGT Here to Stay?

While we’ve seen promises from Labour to keep CGT rates stable, the fact remains that tax rates are often subject to change based on economic conditions and policy decisions. Investors should remain aware of both current and potential future changes to plan their financial strategies accordingly.

How to Prepare for the New CGT Rates

1. Consult a Tax Advisor: With higher stakes, professional guidance can help optimize your tax strategy and take advantage of available allowances.
2. Consider Timing and Structuring Sales: Strategic timing can mitigate tax impacts, especially if you plan multiple disposals.
3. Explore Relief Options: Investigate reliefs like Private Residence Relief or Business Asset Disposal Relief, which may reduce your tax liability.

The Bottom Line

As CGT rates increase, property investors need to adapt and plan more carefully. Stay tuned to our blog for updates, and as always, feel free to contact us for tailored advice on how to manage your property assets effectively.

For more infomation see https://www.gov.uk/government/publications/changes-to-the-rates-of-capital-gains-tax/1cf25453-5b0c-4e7b-9165-65cf117e0af0