Speculation continues to grow that the Labour government will align capital gains tax (CGT) rates with income tax bands when Chancellor Rachel Reeves presents the Labour government’s first Budget at the end of this month.
CGT is paid when you sell an asset that has increased in value since you bought it. Generally, your main home is exempt from CGT due to private residence relief. However, if HMRC decides that a property isn’t your main residence, you must pay CGT on any gain in its value above your CGT allowance when selling a second home in England and Wales.
Currently, the CGT charged on the profits made on a second property is 18% for a basic-rate taxpayer and 24% for higher-rate taxpayers (those with a taxable income of £50,271 and more).
Any move to raise CGT in line with income tax rates would have a significant impact on many taxpayers. Basic rate taxpayers would see an increase from 18% to 20%, while the CGT for a higher rate taxpayer on the profit would rise from 24% to 40%.
An additional rate taxpayer would see the figure rise from 24% to 45%.
Fears over the impact of such expected hikes in CGT rates have resulted in many second homeowners and buy-to-let landlords choosing to sell their properties before any changes are introduced.
According to an article in the Telegraph (20 September 2024), a record £197m in CGT was paid in August this year as landlords and investors rushed to sell up ahead of the Budget.
The figure marked the highest tax take for August since at least 2008. So far this year, landlords and investors have paid £76m more than in 2023, according to HMRC.
The appeal of owning a second property started to wane after the previous government announced in March 2024 that it was abolishing the furnished holiday lettings (FHL) allowance.
The FHL allowed some owners of second homes to treat the rental income as trading income, allowing those who met the relevant criteria to deduct mortgage interest from rental income, claim capital allowances on furnishing the property, and affording owners certain CGT reliefs when the property was sold.
The current treatment FHLs benefit from will be abolished from 6 April 2025.
Chancellor Rachel Reeves has remained tight-lipped over any CGT changes that will likely be announced in the upcoming Budget. However, her previous statement that the government will have to raise some taxes, while ruling out any rise in value added tax (VAT), income tax or National Insurance, has led many to believe a hike in CGT is imminent.
Historically, changes to the tax system are generally introduced from the start of the following tax year on 6 April, meaning a rise in the CGT rate is likely to apply from April 2025.
Such a timeframe will give owners of second homes limited time to react to any changes. We strongly suggest that those affected by changes in CGT rates consider their options ahead of any official announcement to best protect their investments.
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This blog was prepared on 1 October 2024. It is not intended to be advice and should not be relied upon as such.