Understanding the Capital Gains Tax changes for landlords in 2024

As we near the end of 2024, landlords across the UK are likely feeling the heat as changes to Capital Gains Tax (CGT) linger. Whether you’re a seasoned investor or a relatively new property owner, understanding the implications of these changes is crucial if you’re considering selling any properties.

In this blog, we’ll take a closer look at the Capital Gains Tax changes that came into effect this year and how they may impact your decisions. So, sit back, and let’s delve into the world of taxes (we promise it’s not as boring as it sounds).

What is Capital Gains Tax (CGT)?

Before we get into the nitty-gritty, let’s quickly recap what Capital Gains Tax is. CGT is a tax on the profit (or gain) you make from selling certain types of assets, including property. As a landlord, when you sell a property that isn’t your primary residence, any gain you make is subject to CGT.

Sounds like fun, right? But don’t worry; it’s not as painful as it may seem, especially if you’re aware of the allowances and reliefs that apply.

A quick recap of CGT for landlords

As a landlord, CGT only applies to the sale of rental properties (unless it’s your primary residence, in which case you may be eligible for Private Residence Relief). The profit you make on the sale of the property is calculated by subtracting the original purchase price (plus any allowable costs like legal fees, stamp duty, and improvements) from the sale price.

In the past, landlords have been able to benefit from tax-free allowances, which could reduce the amount of CGT they had to pay. However, in 2024, there were significant changes. So, let’s dive into what those changes look like.

The reduction in tax-free allowances: What you need to know

One of the most significant changes faced in 2024 is the reduction in the tax-free allowance for Capital Gains Tax. Up until now, the annual exempt amount – the amount of profit you could make before CGT was charged – has been set at 12,300.

However, in April 2024, this allowance was reduced to just £6,000, and in April 2025, it will be slashed even further to £3,000. Yes, you read that right. These changes could have a significant impact on landlords who are considering selling property in the near future.

So what does this mean for you? If you’re planning to sell a property this year, any gains above the £6,000 exemption will be taxed at the applicable CGT rates. For higher-rate taxpayers, this means you could be looking at a tax rate of 28%, while basic-rate taxpayers will pay 18%. That’s a hefty chunk of change.

For example, if you sold a rental property and made a gain of £15,000, you’d only be able to offset £6,000 of that gain tax-free. The remaining £9,000 would be subject to CGT, at the appropriate rate depending on your tax band.

How will this affect your property sales?

The changes to Capital Gains Tax have a significant impact on landlords’ decisions regarding property sales. With the reduced tax-free allowance, landlords find themselves paying more in tax than they initially anticipated. This could make selling rental properties less attractive, especially for those with smaller portfolios or properties that have appreciated significantly in value over the years.

For example, if you’re sitting on a property that has appreciated by £50,000, the reduction in your CGT exemption could mean you end up paying much more in tax than you would have before. With the reduced allowance, you might now be taxed on a larger portion of your gain, leading to a bigger financial hit.

For those looking to cash in on their property’s appreciation, these changes may force some difficult decisions. Do you still sell and pay the tax, or do you hold on to the property and wait for better financial circumstances? Unfortunately, the reduced tax-free allowances may delay some sales or even lead to property owners reconsidering their plans.

What can landlords do to minimise the impact of the Capital Gains Tax Changes?

While these changes are inevitable, there are steps landlords can take to reduce the amount of tax they’ll need to pay. The key is careful planning and understanding the various reliefs and exemptions that may still be available to you.

Here are a few tips for navigating these changes:

• Use your annual exemptions wisely: Even though the exemption is lower, it’s still worth using it. If you have multiple properties, consider selling them in different tax years to make use of the current exemption limits. Selling one property this year and another next year could allow you to use two exemptions rather than one. 
• Consider private residence relief: If the property you’re selling has ever been your primary residence (even if it was just for a short period), you may be able to claim Private Residence Relief, which could reduce the amount of CGT you owe.
• Take advantage of capital losses: If you’ve sold other assets at a loss in previous years, you may be able to offset those losses against your property gains. This can help reduce your overall CGT liability. 
• Reinvest in property: If you’re planning to reinvest the proceeds of your sale into another property, consider utilising a ‘like for like’ exchange under the current rules. This could defer some of your CGT obligations until a later date. 
• Consult a tax professional: As always, it’s a good idea to speak with a tax advisor to understand the full impact of the changes and how they apply to your specific situation. 

Key factors that could impact CGT for landlords

While the reduction in tax-free allowances is a significant change, it’s not the only factor landlords need to consider when calculating their CGT liability. Other factors, such as property improvements and the timing of the scale, can also affect your final tax bill.

If you’ve made improvements to your property, such as renovating the kitchen or installing a new boiler, for example, these costs can be deducted from your gain. This means you’ll only be taxed on the profit you make after deducting these costs, which could help reduce your overall CGT liability.

Additionally, the timing of your sale is critical. If you’re selling property as part of a long-term investment strategy, holding onto it for a few more years could result in a larger gain, but it also means you might have to pay more tax. Conversely, selling earlier may mean lower gains but potentially higher tax-free allowances.

The bottom line: how the Capital Gains Tax changes will impact landlords

The Capital Gains Tax changes that came into effect this year are a game-changer for landlords. With the reduction in tax-free allowances, many landlords will find themselves paying more tax on their property sales than they anticipated. However, by planning ahead and understanding the options available to you, it’s still possible to minimise the impact of these changes.

If you’re considering selling a property, it’s crucial to take the time to review your tax situation carefully. Speak with a professional, consider your timing, and explore your options for offsetting CGT with reliefs and exemptions.

Remember, the goal is to make informed decisions that align with your long-term financial strategy. By understanding the capital gains tax changes, you can ensure that your property sales don’t end up costing you more than they should.

Alongside staying on top of landlord tax changes, it’s important to stay on top of your landlord insurance coverage too. Looking to compare landlord insurance quotes? Turn to us at CIA Landlords. Get a quote online or call 01788 818 670.