Will New Capital Gains Tax Legislation Lead to an Exodus of Landlords in the Property Market?

For many landlords, the Chancellor of the Exquisitor, Rishi Sunak, could go from hero to zero. The Government needs to find ways to claw back some much-needed money in the wake of coronavirus spending, and it seems that Capital Gains Tax (CGT) is in the Chancellor’s sights.

A report from the Government’s tax advisors, The Office of Tax Simplification, suggests that Rishi Sunak could bring CGT in line with income tax. That would see higher-rate taxpayers forking out a flat rate of 40-45 per cent when they sell their second home. The CGT allowance threshold could also be reduced from £12,300 to £5,000 or less.

What does this mean for landlords, and will you be affected by potential changes to CGT? We’ve put this guide together looking at how new regulations around CGT could impact the millions of landlords in the UK. Read on to see how it affects you.

What is Capital Gains Tax?

Capital Gains Tax is the profit on an item sold that has increased in value since the initial purchase. It’s the gain that is taxed: if you bought a second home for £350k and sold it for £400k, you would be taxed on the £50k.

The rate comes into effect for second homes (including buy-to-lets), inherited properties, shares and investment funds. It changes depending on the asset and whether the seller is a basic, higher or additional-rate taxpayer.

For the sale of a second home, sellers currently pay 18 per cent if they’re a basic-rate taxpayer and 28 per cent if they’re in the higher tax bracket. Under any potential new rules, high-rate taxpayers could see the threshold increase from 28 per cent to between 40 and 45 per cent.

What happens to the Capital Gains exemption on a main residential property? 

Currently, homeowners don’t need to pay Capital Gains Tax on their residential property which acts as their primary residence. The report from the Government’s tax advisors doesn’t mention any about changes to CGT on primary residencies.

While we won’t know the outcome until an official announcement, we can safely assume that CGT will stay the same on your main residential property. Therefore, you won’t need to pay extra tax on the house that you live in and wish to sell.

two people sat down examining receipts on a table

Will using a holding company avoid me having to pay Capital Gains Tax on the sale of my rental properties? 

Ok, so the potential new CGT rates don’t paint a pretty picture if you’re a landlord. But it’s worth remembering that CGT only applies to the individual and there are ways to avoid an outlay on huge CGT sums. Using a holding company to purchase an investment property would see you buy a rental property as a business, meaning you’re treated as such when you sell the asset.

Landlords who can successfully buy or transfer a property from personal ownership to a holding company would avoid paying Capital Gains Tax. However, there are other costs that you’d need to take into account, such as corporation Tax, which is set at 19 per cent and is taken off the profit a company derives.

In a landlord’s case, it would be all rental income minus mortgage and maintenance expenses. You could also subtract paying yourself a salary as a cost (but then you’d have an income tax liability). However, these rates are likely to be  significantly lower than the current 28 per cent or proposed 40 to 45 per cent.

Going down this route could also see you get other tax reliefs, though these would likely be minimal. You should talk to your accountant before transferring any assets to a holding company, as there may be implications surrounding your personal financial circumstances.

Should I sell my rental properties ahead of the new rule coming out?

Potential changes to Capital Gains Tax could see landlords racing to sell their rental properties in record numbers. Whether you should sell or keep your property will come down to each landlord’s personal situation.

Some landlords will bear the brunt of any potential new rules, in favour of maximising their yields and holding onto assets in the long run. Others, however, may feel that the CGT hike is another hammer blow after the increase in stamp duty and phasing out of mortgage interest relief.

Speaking to Landlord Zone, Paul Shamplina of Landlord Action, says: “An increase in CGT is likely to prompt a flood of landlords selling up before the deadline, further reducing the supply of rental properties available to tenants.”

How is the rental market looking?

The current climate has made it hard enough for landlords, and news about an increase in CGT will be met with disdain. For landlords looking for a crumb of comfort, the overall rental market is seeing record numbers of demand and looks set to account for a significant portion of the UK housing market going forward.

If you would like to talk about your options as a landlord, get in touch with one of our lettings experts. They will be happy to advise you on your next move in the rental market.

Comments 0


Tenancy deposit
Money shield
Local heroes
Approved code
Property ombudsman
Open banking
Mashroom is an appointed representative of Adelphi Insurance Brokers Ltd. Adelphi Insurance Brokers Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Their Financial Services Register number is 594620, with permitted business activities being introducing, advising, arranging, dealing as agent, assisting in the administration and performance of general insurance contracts and credit broking in relation to insurance instalment facilities. You may check this on the Financial Services Register by visiting the FCA’s website, register.fca.org.uk or by contacting the FCA on 0800 111 6768