On 30 October, Rachel Reeves will deliver the new Labour government’s first Budget.
Having already warned of a “£22 billion black hole” in the public finances, the chancellor’s first speech will likely include some tax rises.
Considering that, during the election campaign, the party pledged not to increase the rates of Income Tax, National Insurance, and VAT, other levies including Inheritance Tax and Capital Gains Tax (CGT) are likely to be in the chancellor’s sights.
If you own a second property or a buy-to-let, or you’re a portfolio landlord, reforms to CGT could significantly increase your tax liability. Read on to find out more.
You pay Capital Gains Tax on profits you make from the sale of a buy-to-let or second property
Since their election in July, Labour has repeatedly argued that the economic position they have found themselves in is worse than previously anticipated – and that means tough decisions are needed.
Indeed, the prime minister, Keir Starmer, has warned that this October’s Budget is likely to be “painful”.
The chancellor has already ended winter fuel payments for about 10 million pensioners and will use the Budget to announce further measures.
CGT is a tax paid on profits you make when you sell (or otherwise dispose) of an asset. While your primary residence is exempt from CGT, gains made from sales of second or buy-to-let properties are generally liable for the tax.
Individuals benefit from an Annual Exempt Amount of £3,000 (2024/25), meaning that you can make gains of up to £3,000 this tax year before any CGT is due.
The rate of CGT you pay is determined by your tax bracket and the type of asset sold.
At present, if you make a gain on the sale of a buy-to-let property you’ll pay a tax rate of 18% if you’re a basic-rate taxpayer, and 24% as a higher- or additional-rate taxpayer.
Chancellor likely to reform CGT in the Autumn Budget
Ahead of the 30 October Budget, there is speculation that one of the reforms the chancellor will announce is that she will align CGT rates with Income Tax rates.
This would mean that, on the sale of a buy-to-let property, a basic-rate taxpayer would see the rate rise from 18% to 20%. Meanwhile, a higher- or additional-rate taxpayer would see the rate of tax rise from 24% to 40% or 45%.
Research reported by Mortgage Strategy suggests this reform would mean a higher-rate taxpayer would pay an average of £28,400 in CGT if rates were to be increased in line with Income Tax (to 40%).
This represents an average increase of £11,360 in their CGT liability.
A basic-rate taxpayer would pay £14,200 on an average UK property gain if the rates go up as predicted, adding £1,420 to what they would pay under the current rates.
Although capital gains and Income Tax are separate, any profits you make from the sale of a second property are usually added to your other income to decide the rate paid. So, it’s easy to see how even a modest profit could drag you into the higher-rate CGT bracket and significantly increase your tax liability.
Reforms to Business Asset Disposal Relief could affect property business owners
At present, Business Asset Disposal Relief (BADR) – formerly Entrepreneurs’ Relief – allows entrepreneurs to pay a tax rate of 10% on gains they make when they sell their business, up to a maximum lifetime limit of £1 million.
The rules are complex, but you can normally claim this relief on the sale of the whole or part of a business that you had owned throughout the two years up to the date of disposal.
There is speculation that the chancellor could reform this relief – or abolish it altogether – in the Autumn Budget.
This could affect you if you own your own business and want to sell assets. Either the lifetime gain limit could fall, or the 10% rate could be abolished altogether. If BADR is removed, in line with an alignment of CGT and Income Tax rates, you could see the tax rate you pay rise from 10% to 40% or 45%, significantly increasing your liability.
Disposing of assets before 29 October could help you avoid any reforms
If you were planning to sell a property, completing the transaction before 29 October could be a prudent move. This will ensure that any gains are liable for tax at the current rates.
Of course, the chancellor may announce a future date at which any reforms will come into force, so you may have a period of weeks or months to complete any transactions before changes to the rules.
However, it’s worth remembering that reforms to BADR came into effect immediately after they were announced in the 2020 Budget, so there may be no period of grace.
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Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
The Financial Conduct Authority does not regulate buy-to-let (pure) and commercial mortgages.
