Landlords could be hit with a significant increase in capital gains tax (CGT) under changes expected in the upcoming Autumn Budget. According to research by London lettings and estate agent Benham and Reeves, the average landlord could see their CGT bill jump by up to £15,000 per property if Labour’s proposed equalisation of CGT with income tax becomes reality.
Impact of potential CGT changes on landlords
The research analysed the current capital gains tax paid by landlords and explored how this could change if the tax thresholds are aligned with income tax rates. Currently, landlords in the UK typically remain in the buy-to-let sector for around a decade, during which time the value of their investment has, on average, increased by £105,054 per property.
Taking into account costs such as stamp duty and estate agent fees, this leaves an average profit of £96,651 per property. At current CGT rates, this would result in a tax bill of £16,857 for basic rate taxpayers (18%) or £22,476 for higher rate taxpayers (28%).
However, if Labour’s expected tax reforms are introduced in the Autumn Budget on 30th October, landlords in the higher tax bracket could see their CGT rate rise to 40%, a substantial 16% increase. This would push the tax bill for a higher rate taxpayer to £37,460—an increase of £14,984 per property. Basic rate taxpayers would see a smaller increase, paying £1,873 more than they currently do.
Regional variations and landlord strategies
The impact of these changes will vary by region, with landlords in the East of England, London, and the South East expected to see the highest profits over the last decade, with gains exceeding £100,000 per property. This means that landlords in these areas would also face the largest tax hikes if CGT is aligned with income tax.
Given the potential financial burden, more landlords are turning to limited companies to manage their buy-to-let portfolios. By doing so, they can avoid paying CGT on residential properties and instead pay corporation tax at a rate of 19%, compared to the current 28% CGT rate for higher taxpayers. Should the CGT rate rise to 40%, this strategy could become even more attractive for landlords seeking to reduce their tax liability.
Industry concerns
Marc von Grundherr, Director at Benham and Reeves, expressed concern about the potential impact of these changes on the rental market: “Buy-to-let landlords have been targeted by a number of laws and legislative changes over recent years, all designed to reduce the profitability and tempt more landlords to quit the sector, thus, in theory, freeing up more stock for owner-occupier homebuyers.”
He added that while some landlords have exited the market, many continue to view buy-to-let as a viable investment and are exploring ways to mitigate tax increases. “It’s perhaps a tad overenthusiastic to describe this trend as a mass exodus, and many landlords continue to see buy-to-let investment as an extremely worthwhile endeavour.”
Von Grundherr warned that further tax hikes in the Autumn Statement could exacerbate the rental crisis: “Any further attack on landlords is only likely to see private rental stock levels reduce further, exacerbating the rental crisis in the process and driving rents ever higher at the expense of tenants.”
