There is a buy-to-let exodus on the horizon as landlords are currently selling up to avoid additional levies on their profits. Landlords will be faced with a capital gains tax which will see the average property owner lose around £2,600 when selling a property that has risen in value. It comes as the annual exemption figure for capital gains tax will be reduced from £12,300 to £6,000 next year. By 2024 this will drop to £3,000. Landlords will face a tax rate of 18 per cent and that rises to 28 per cent for those higher-rate taxpayers. Capital gains tax is charged on the profit the landlord makes when they come to sell a buy-to-let.
How many landlords are there in the UK and what does this mean for them?
The UK currently has around 2.65m landlords who rent out properties to individuals, friends, couples and families. That’s according to statistics from HMRC. Many of these second homeowners own properties which have rapidly risen in value.
How does capital gains tax work for landlords?
On a residential home, the tax is set at 18 per cent for those in the basic rate tax bracket, while those in a higher rate group will pay 28 per cent. If you are selling your own primary residence, this is not applicable. Currently, landlords pay capital gains tax if the extra they accrue when selling off a property rises above the £12,300 tax-free allowance in a tax year. Once this is surpassed, tax will have to be paid on it. A second homeowner, investor or landlord selling their buy-to-let home, which they bought for £100,000, for £200,000 will have seen a profit of £100,000. But given the existing capital gains tax allowance, this profit drops to £87,700.
Is there a way to avoid the hike?
Looking at England and Wales, a typical landlord who sold a buy-to-let home enjoyed a profit of just over £98,000. Estate agent Hamptons carried out this research and it found some staggering figures. The average higher-rate taxpayer would then be faced with a capital gains tax charge of just over £21,000. This exemption threshold will drop next year to £6,000. That means a typical landlord who is a higher-rate taxpayer will be charged roughly an additional £1,770 in tax. The reduction to £6,000 and down to £3,000 over the next few years means that landlords or investors selling properties face a far larger bill. However, according to The Express there are means of arranging their finances to reduce tax liability, such as transferring money into tax-exempt ISAs or into pensions.
What to do if you are moving out of the rental market?
If you are considering moving out of the rental market, conveyancing solicitors Hemel Hempstead and elsewhere will be on hand to assist with the paperwork. Firms such as Sam Conveyancing can provide access to a team of professionals who offer the full range of services.
Moving into a buying market
The property market remains active, with some couples and families who may previously have rented now considering buying their own homes. For renters, this landlord exodus means a reduction in the supply of rented properties across the UK and potentially higher rents for families, which may push still more of them into a buying market.