Update on Capital Gains Tax for landlords
Since 2015, a wave of adverse tax changes have been introduced affecting landlords. This, along with other factors, has seen many landlords selling properties, and some exit the buy-to-let market altogether. Experts at NRLA partner RITA4Rent explore the recent changes.
When properties are disposed by landlords, Capital Gains Tax (CGT) will normally be a consideration. By disposed, this is often by sale, but an outright gift can also trigger a disposal for CGT.
The only exception to this is, death which is not considered a disposal for CGT (although you could well have other considerations with inheritance tax instead). Transfers between spouses or civil partners are on a no gain/no loss basis which also means no CGT.
Here we look at the latest changes and the reporting requirements.
New Annual Exemption
Over the last few years there has been some concern about the rate of CGT rising. The most common rumour being that the CGT rates may substantially increase to be in line with income tax.
At the moment, the rates for residential properties remain at 18% for any amount of the gain in the basic rate, and 28% for any gain in the higher rate.
There has, however, been a recent change to the annual exemption. The easiest way to describe an annual exemption is that it is effectively the equivalent to a personal allowance for income tax, but for CGT. Therefore, you can receive a certain amount of gains that are free of CGT before it is taxed.
The annual exemption is to be reduced from £12,300 to £6,000 in 2023/24, and to £3,000 in 2024/25.
This is best illustrated by an example:
An individual makes a capital gain of £20,000 from selling a residential property. They have a salary of £40,270, which is their only other source of income.
First, we need to calculate the amount of potential gain covered by the basic rate band.
The higher rate band is currently £50,270, and so there is £10,000 basic rate band remaining (£50,270 - £40,270 salary).
In the 2022/23 tax year, there is an annual exemption of £12,300, meaning the capital gain above, less the annual exemption, remains within the basic rate band.
However, as the annual exemption changes over the coming years, let’s look at how this affects the position:
2022/23
Chargeable Gain: £20,000
Less Annual Exemption (£12,300)
Taxable Gain £7,700
Tax
£7,700 @ 18% £1,386
2023/24
Chargeable Gain: £20,000
Less Annual Exemption (£6,000)
Taxable Gain £14,000
Tax
£10,000 @ 18% £1,800
£4,000 @ 28% £1,120
Total CGT £2,920
2024/25
Chargeable Gain: £20,000
Less Annual Exemption (£3,000)
Taxable Gain £17,000
Tax
£10,000 @ 18% £1,800
£7,000 @ 28% £1,960
Total CGT £3,760
As you can see, the capital gains tax has increased quite substantially in this example even though the rate has not increased. The difference in capital gains tax between 2024/25 and 2022/23 is £2,374.
Reporting Requirements
The requirement to file a CGT return is still being overlooked by many landlords and so late filing penalties can build up.
The deadline is currently 60 days from the date of completion. For sales between 6th April 2020 and 26th October 2021, the period was 30 days.
Following on from the above, it is important to identify when the 60-day period starts. Whilst the disposal date for CGT is when you exchange contracts, the 60-day time limit for a CGT return actually starts from the completion date. You will be asked for both dates when completing your CGT return.
This applies for UK residents and for all disposals of UK residential property where there is CGT to pay. If the gain is covered by the annual exemption, or you have made a loss, then there is no requirement to complete a CGT return. You are also not required to complete a CGT return once the self-assessment tax return has been filed. This may be applicable to disposals in March where someone completes their tax return in April.
It is worth noting that the reporting requirements for non-residents are a bit more onerous and not limited to disposals of residential properties. Non-residents may also be required to report disposals where there is no CGT to pay, but this is outside the scope of this feature.
Separating Spouses
As mentioned previously, spouses do not normally pay CGT on transfers between the two of them as this is on a no gain/no loss basis.
A long-term problem has been when a married couple permanently separate, the no gain/no loss basis has only applied for the remainder of the tax year of separation. Therefore it was better for people to separate in mid to late April to give the longest possible period to agree a divorce settlement; separating in March was of course more troublesome from a tax perspective!
The 2023 Budget has addressed this issue, and it was announced that for transfers made from 6th April 2023, the no gain/no loss treatment would be extended to three years after the year of separation, or for an unlimited period where it is part of a formal divorce agreement.
We hope this feature has been helpful, and for any of your property tax needs, please do not hesitate to contact RITA4Rent for a quote today by clicking here.
