With Labour’s first Autumn Budget fast approaching, property owners are gearing up to see how changes to the UK tax system could impact their finances.
There is little doubt that the UK economy faces significant challenges, with a much-touted £22bn black hole in the country’s finances and the Prime Minister, Sir Keir Starmer warning “Things will get worse before we get better.”
As Chancellor Rachel Reeves prepares her Autumn Budget, most households will be anticipating what her strategy will mean for them. With earlier comments from the Prime Minister suggesting that “those with the broadest shoulders should bear the heavier burden”, there has been wide speculation about how and where this burden will manifest.
Capital gains tax (CGT) is often regarded as a tempting avenue for increasing tax revenue, with both Conservative and Labour governments making changes to CGT since the 1980s.
Keir Starmer’s government is currently against increasing VAT, Income Tax or National insurance, so it is reasonable to suspect that CGT will be targeted within the Autumn Budget to allow Labour to protect its manifesto pledges.
This article will focus on what we know about CGT, why it matters and how any changes in policy in this area could impact the property market.
This article is based on current tax legislation at the time of publication. These rules may be subject to change. You should always seek appropriate tax advice based on your individual circumstances before making any decisions.
Capital Gains Tax is owed when an individual sells an asset. These assets can include most personal possessions worth £6,000 or more, apart from your car, a second home, and shares held within a company.
When an asset is sold (or ‘disposed of’) you will pay tax on the difference between what you paid for the asset and the amount you sell it for.
There is something of a myth surrounding CGT as some people falsely believe it is a tax that only applies to the ‘rich’. This is not true and understanding what tax you may need to pay on the sale of an asset can help ensure that you aren’t caught out.
The final amount of tax owed will depend on any “allowable expenses” such as house repairs that apply to the transaction. Although these allowances can be complex and subject to change, so it is always worth seeking financial advice if you are unsure about what you might be expected to pay.
As of the beginning of September 2024, you pay a different rate of tax on gains from residential property than you do on other assets.
You would not normally pay CGT on the sale of a residential property. Specifically, all of the following conditions apply, you would receive a tax relief called Private Residence Relief and not pay any capital gains tax:
If you sell an asset and are on a Higher or Additional rate of Income Tax, you’ll pay:
If you pay the Basic Rate of tax, the capital gains you’ll pay on a sold asset will depend on several factors. These include the size of your gain, your taxable income and whether the gain has come from the sale of a residential property or other assets.
To work out what CGT is payable on the disposal of assets if you are on the Basic Rate of tax you’ll need to:
There are also specific rates for capital gains that apply to Trustees, Personal Representatives and Businesses.
If you are a trustee or personal representative of someone who has died, the amount paid for capital gains is 24% on residential property and 20% on other chargeable assets.
A personal representative for someone who has passed away will pay 28% on carried interest.
Sole traders and partnerships with gains that qualify for Business Asset Disposal Relief will pay 10% on capital gains.
You can learn more about current CGT rules here.
According to the House of Commons Library, Tax Statistics: An Overview, 10 May 2024, VAT, Income Tax, and National Insurance make up a combined 57% of current government revenue.
With Labour’s manifesto pledge to increase these taxes, or the headline rate of corporation tax, it will fall to other areas to allow the current government to raise further funds.
A change to CGT is certainly one option that the government could consider, as changes to this tax could be implemented relatively quickly. However, the treasury will need to consider these options carefully, as government models suggest that a sharp rise in CGT could actually lower total tax revenues for 2027/8.
The government is considering raising Capital Gains Tax (CGT) rates to match income tax rates, which could result in significant changes for taxpayers. Currently, basic rate taxpayers pay CGT at 10% on most assets and 18% on residential property or carried interest. Higher rate taxpayers face 20% on other assets and 28% on residential property. If CGT is aligned with income tax rates, the basic rate for CGT could increase to 20%, and the higher rate could rise to 40% or even 45%.
Depending on anticipated behavioural changes, this could increase tax revenues. However, if individuals decide against disposing of CGT-liable properties due to the higher rate, this could have a negative impact on other taxes like Stamp Duty.
The government could also decide to review existing exemptions and allowances. These could include CGT allowances for personal possessions or exemptions such as Business Asset Disposal relief, which is currently a flat rate of 10% CGT rate for qualifying business assets.
For property owners whose strategy is to dispose of an asset in the near future, there is a compelling argument for completing the sale before the October budget announcement.
Historically, some changes to taxation have taken months to implement while others have come into force with immediate effect, so it can be difficult to predict when to anticipate any change will impact the sale of an asset.
If you are looking to sell a property, the auction route can be a faster route to completing a sale with contacts exchanging within weeks rather than months on the open market.
To find out more about selling at auction and to book a free property appraisal, simply contact our friendly, professional team on the link below.
It is important to remember that tax is only part of your overall investment strategy and that you should seek professional financial advice before implementing any changes. If you would like to discuss your financial options, our financial services team is available to speak to you at a time that works for you.
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