Understanding Capital Gains Tax Changes for Landlords
CGT or capital gains tax is paid by landlords when they sell, gift, or otherwise dispose of all or part of an investment property.
Sometimes other homeowners pay CGT when selling a parcel of land to a developer.
CGT rules for calculating the tax due have stayed the same for some time, but Chancellor Jeremy Hunt reduced the amount a landlord walks away from a deal with at a stroke in his recent budget.
Here’s how the new rules affect landlords.
What is CGT?
Capital gains tax is paid on the profit or gains someone makes when disposing of an asset - in this case, land or buildings.
Static caravans and houseboats count as residential property for CGT.
Other assets, like art, fine wines and antiques, can attract CGT, but the tax rate and rules for claiming reliefs may vary.
Who pays CGT?
The critical point is that companies do not pay CGT; individuals do. That doesn’t mean corporate landlords escape tax-free. Instead of CGT, companies lump any gains with profits and pay tax on the entire sum.
Individuals separate the capital gain from income and determine how much CGT is due.
Expats and foreign owners with UK residential property must pay CGT too.
Taxing CGT gains
Property investors are given a use-it-or-lose-it annual exemption every financial year, which acts like a personal allowance for income tax.
In 2022-23, the annual exempt amount (AEA) was £12,300.
Applying the AEA meant landlords could pocket £12,300 of any capital gain without paying tax.
However, the Chancellor has changed the AEA without altering tax rates, increasing the amount landlords must pay.
CGT on residential property attracts a surcharge and is paid at 18 per cent by basic rate taxpayers and 28 per cent by higher and additional rate taxpayers.
Here’s an example of how the tax on the same gain changes over the years under the new rules.
Tax @ 18%
Tax @ 28%
When is CGT paid?
The most common response to the question is CGT is paid alongside income tax in January each year.
Since October 2021, CGT has been due in full after 60 days from the completion of the disposal. Failing to file a return or pay the amount results in late penalty charges. You can’t fudge this as the conveyance lawyer files papers with the date with the Land Registry.
Expats and foreign residential property owners have a 30-day filing window.
But if the AEA or a loss wipes out the gain, there’s no need to file a return.
No limits for divorcing couples
Usually, property transfers between married couples do not attract CGT because switching ownership between them generates no gain or loss.
However, the Chancellor decided to change the rules for separating couples. Until the last budget, any transfers between couples were only CGT-free during the tax year of separation, and this often forced couples to part in April to have 12 months ahead before they needed to consider CGT.
This changes for separations after April 6, 2023.
The no gain/no loss tax treatment is extended to three years for separating couples, while divorced partners now have no limit when the switch in ownership is part of a formal financial agreement.
Save CGT by income shifting.
Property investors can streamline the taxes they pay with income shifting.
Income shifting is a perfectly legal tax strategy that allows married couples to minimise their taxes by giving majority ownership to a basic-rate taxpayer.
A spouse or civil partner paying higher or additional rate tax can shift that income to a spouse who pays income tax and CGT at a lower rate. Tax rates fall from 40 per cent on income and CGT of 28 per cent on disposal of an investment property to 20 per cent on income and 18 per cent CGT.
Each partner also qualifies for the annual exempt amount.
For example, using the £20,000 gain above for 2022/23, income shifting from a sole to joint ownership would wipe out the CGT due as each owner can claim £12,300 AEA, making a £24,600 AEA for a £20,000 gain.
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