If you’ve been a landlord for a while, your tax burden has likely risen in recent years.
Since 2020, landlords haven’t been allowed to deduct their mortgage costs from their rental income. All the rental income you earn will be taxable and, instead, you receive a 20% tax credit for your mortgage interest, which can go against your final tax bill.
However, in the 2024 Spring Budget, the chancellor announced a change that could reduce your tax burden when you come to sell a rental property. Read on to find out more about two key changes to the Capital Gains Tax (CGT) regime coming in 2024/25 that you need to know about if you’re a landlord or you own a second property.
Higher-rate Capital Gains Tax for second properties is falling to 24%
In a positive boost for landlords, the chancellor announced a reduction in one of the key tax rates that you will face when selling a rental property.
CGT is due on the profits that you make when you sell or dispose of an asset such as a second or buy-to-let property. It’s important to remember that it is calculated based on the gain that you make when you sell, not simply on the sale price of the property.
Previously, the CGT rates that applied to second property sales were:
- 18% for basic-rate taxpayers
- 28% for higher- and additional-rate taxpayers.
In the Spring Budget, the chancellor announced he was reducing the higher rate from 28% to 24%. The lower rate will remain at 18% for any gains that fall within your basic-rate band.
The government say that “this will encourage landlords and second homeowners to sell their properties, making more available for a variety of buyers including those looking to get on the housing ladder for the first time, while also raising revenue over the forecast period.”
Considering that Private Residence Relief will remain in place, the vast majority of residential property disposals will pay no CGT.
Figures reported by the Telegraph show that, if you’re a higher-rate taxpayer making a gain of £100,000 on the sale of a residential property, you will save between £3,269 and £3,880, depending on your income. The chart below illustrates the savings you could make under the new tax rate.
Source: the Telegraph
The Capital Gains Tax Annual Exempt Amount is falling to £3,000
If you sell or dispose of a second property, you may be able to take advantage of the CGT Annual Exempt Amount. This is the amount of profit you can make before CGT is due.
Just two years ago, in 2022/23, the Annual Exempt Amount stood at £12,300. This meant that the first £12,300 of any gain you made from selling a buy-to-let property was free of CGT.
However, the Annual Exempt Amount fell to £6,000 in 2023/24, and again to £3,000 in 2024/25. Consequently, you can now only make £3,000 of profit before tax is due. It means you’ll likely pay tax on more of the profit you make – albeit now at a lower rate if you’re a higher- or additional-rate taxpayer.
Chris Norris, policy director at the National Residential Landlord Association, said that the chancellor’s cut to CGT was “slightly misleading”, arguing that it “will be all but neutralised by the reduction in the annual tax-free allowance” [the Annual Exempt Amount].
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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.
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.
