In recent months, landlords have been anxiously following developments around potential changes to Capital Gains Tax (CGT), fearing further strain on an already challenging buy-to-let market. This apprehension comes at a time when the market is facing serious hurdles—new buy-to-let loans dropped by 17.3% in value during the first quarter of 2024 compared to the same period in 2023, with just over 41,000 loans approved.
A key concern for landlords has been speculation that CGT rates on property sales, including second homes, could soar to as high as 39%. Such a hike would have been devastating for those already grappling with rising costs and increasing regulatory requirements. However, recent reports suggest that while the government does plan to raise CGT on share sales and other assets, the tax rate for second homes and buy-to-let properties will remain unchanged. In this blog, I will go over what we know so far, and what the changes to capital gains tax might mean.
Capital Gains Tax And The Buy To Let Market
The buy-to-let sector has already been under immense pressure in 2024. Landlords are now required to make costly upgrades to properties to meet new regulations, adding financial strain. With talk of a potential CGT hike, some landlords rushed to offload properties, sparking a surge in sales activity as they sought to avoid future tax increases. Despite the frenzy, the government appears to have taken heed of warnings from experts. Many have pointed out that a sharp increase in CGT could result in an exodus of landlords, potentially shrinking the rental housing supply by as much as one million homes. This could trigger higher rents as demand outstrips supply, making the housing crisis worse. In addition, there were fears that a CGT hike would backfire by reducing tax revenue; people may simply delay selling assets to avoid higher tax rates.
CGT On Property Sales Stays Put
According to recent reports, Rachel Reeves, the UK Chancellor of the Exchequer, is moving forward with plans to raise CGT on share sales, but second homes and buy-to-let properties will be spared from any increase. Currently, landlords and homeowners pay CGT rates of 18% and 28% on residential property gains. These rates will remain unchanged, at least for now. The decision comes in response to concerns within the government that aggressive tax hikes could discourage property sales, slowing down the housing market and reducing revenues. A previous reduction in CGT rates in 2022 had the opposite effect, stimulating more transactions and generating £700 million in additional tax revenue. It seems the government is keen to avoid reversing this trend.
What Does This Mean For Landlords?
While landlords may breathe a sigh of relief for now, the broader financial pressures on the buy-to-let market remain. Upgrading properties to meet new standards is still a requirement, and ongoing interest rate hikes are making mortgages more expensive. Additionally, while CGT on property remains steady, the government’s overall tax strategy includes closing other reliefs and raising taxes on share sales, which could affect diversified portfolios. For landlords who also invest in shares, the CGT rate on share profits, currently at 20%, could rise by several percentage points. This change might encourage investors to reconsider their portfolios and possibly rethink future buy-to-let investments.
Speak To A Buy To Let Mortgage Advisor
For now, landlords can rest easy knowing that CGT on property sales remains steady, but the landscape is far from settled. With potential tax increases on the horizon in other areas, and an increasingly regulated property market, it’s essential for property investors to stay informed and prepared for future changes. The government may have dodged an immediate crisis, but challenges for the buy-to-let sector—and the housing market more broadly—are far from over. If you or anyone you know has property investments and wants to discuss anything to do with property finance and mortgages, please feel free to get in touch with our team or mortgage advisors. We are here to help.
