On 3rd March 2021, Chancellor Rishi Sunak will announce his latest tax plans, in the first budget since the UK’s pandemic lockdowns began. Financial experts have predicted that he is most likely to focus on capital gains, pension contributions and inheritance.
Property investment has long been considered a haven for capital growth (over the last decade property values in London have risen by an average of 57%). The predicted reduction in Capital Gains Tax (CGT) allowance will, therefore, be unwelcome news for investors.
How much Capital Gains Tax is payable on UK property?
The Capital Gains Tax rate in the UK is higher for property than for any other asset type. Currently, basic rate taxpayers are charged 18% on any profit arising from the disposal of a property asset, while higher or additional rate taxpayers must pay 28%.
Capital Gains Tax is only payable when the disposal of your property results in a gain of more than £12,300 (note that this figure may change after March 2021). To work out the amount of CGT you owe, you should deduct the amount initially paid for the property from the final sale price. You can then deduct any legitimate expenses from the gains you have made.
What are ‘legitimate expenses’?
You are entitled to claim back certain expenses associated with the property you are selling. These include:
- Solicitors’ and estate agents’ fees. - The stamp duty you paid when you originally purchased the property. - The cost of any significant improvements, such as a roof renovation or building an extension.
Unfortunately, you can’t claim expenses paid out to maintain the property, nor can you deduct mortgage interest.
The amount that remains after you have deducted allowable expenses is the sum that will be subject to CGT. However, if you incur losses on the sale of other assets, you can offset those losses against your CGT allowance. For instance, if you make a loss when selling one property, this will increase the tax-free gain you can make when you sell another property from your portfolio. There is no time limit on claiming against losses, so the amount lost can be carried forward indefinitely.
Can I reduce the CGT burden on my rental property?
Provided the property is your primary residence, you won’t be liable for any Capital Gains Tax when you dispose of it. The situation becomes slightly more complicated when you let part of your primary residence or rent it out following a move to another property.
If you share a part of your primary home with a tenant (‘shared occupancy’), you could be entitled to claim Letting Relief. If you once lived in a property that you now rent out, you will be able to claim for the period when the property was your main home.
Couples who are married, or in a civil partnership, are free to transfer property assets to each other without paying CGT. However, if you go on to sell at a later date, you’ll be charged a sum based on the time you owned the asset as a couple (rather than since the property was passed to your partner).
If you jointly own a property with someone else, you can combine your allowances.This effectively doubles the amount you can make before CGT becomes payable.
A record number of companies were set up last year to administer property portfolios, and this trend is set to continue.
Rishi Sunak’s challenge
The Chancellor has a problem. Over the last twelve months, the government has racked up a bill of £271m as it struggles with the pandemic crisis. In his March budget, the Chancellor will therefore seek ways to raise much-needed funds through taxation.
Increased taxes have already hit buy-to-Let investors. In 2016, the government imposed a 3% surcharge on top of the usual Stamp Duty rate to purchase second homes and Buy-to-Let properties. Additionally, the Capital Gains Tax rules for owners of property assets were tightened just last year.
The average amount of CGT paid by each individual is £32,000 (more than five times the equivalent figure for Income Tax). It is likely that the capital gains payable on a rental property, second homes, and inherited assets will increase yet again when Rishi Sunak delivers his budget.
What are the prospects for London property investors?
The rental market performed strongly in 2020, with the most robust activity in the last two quarters. At times, demand in the private rented sector rose 20% higher than comparable figures for 2019. Perhaps that’s why, despite Stamp Duty changes and the challenges created by the pandemic, enthusiasm for rental property investment seems undimmed. During 2020, the number of Buy-to-Let landlords reached a record high of 2.7m.
Over the past few years, despite political and economic uncertainty, the UK property market has remained resilient. Going forward, it appears likely that softening property prices and low-interest rates will continue to create opportunities for careful investors.
Berkshire Hathaway HomeServices Kay & Co are trusted estate agents specialising in the central London luxury property market. Whether you are a seasoned investor or first-time landlord, our expert advice could help you make the right decision when you are buying a property in the capital. If you would like us to introduce you to a trusted tax consultant please email us by clicking here
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