In the Chancellor’s Autumn Statement of 2022, UK investors were given a substantial shake-up: an unexpected drop in the Capital Gains Tax Allowance. From April 2023, investors have had to face a decrease in the allowance, leaving them to pay thousands more in Capital Gains Tax (CGT).
While this change has a significant effect on investors and landlords, it is also an important consideration for anyone who is looking to sell property in the future.
What is Capital Gains Tax?
Capital Gains Tax is an annual tax applied to profits earned through the sale of an asset. The percentage charged can vary, based on the type of asset sold and the individual's total income. Residential property is charged at a higher rate of taxation compared to other assets, currently standing at 28% for higher and additional rate taxpayers, and 18% for basic rate taxpayers.
You can calculate taxable gain by simply subtracting the original cost of an asset from its sale price. For example, if a property is bought for £250,000 and then subsequently sold for £300,000, the gain would be £50,000. The final amount taxable is the value of this gain, minus the current Capital Gains Tax Allowance threshold.
CGT applies to profits made from selling any asset of value, including real estate. It’s important to note that no CGT is required when you sell your primary home, but if you’re selling a property that has not been used as a primary residence, like a buy-to-let, CGT may need to be paid.
What are the changes to Capital Gains Tax?
One of the biggest changes to Capital Gains Tax is the decrease of the tax-free allowance. This annual allowance, initially set at £12,300 for the 2022/23 fiscal year, has been lowered to a maximum of £6,000 - the threshold after which you must pay tax on capital gains.
Individuals have an annual allowance of £6,000 while trusts are capped at £3,000. However, from 2024/25 onwards, the figures for both will decrease to £3,000 and £1,500 respectively.
Not only do these changes impact landlords and buy-to-let investors, but they could also affect homeowners and those who have inherited properties.
It is estimated that up to half a million people and trusts will be impacted by this change and by 2024 an additional 260,000 people could be liable for Capital Gains Tax, as suggested by government figures.
How does this affect property investors?
The property market is currently undergoing a drastic change, largely due to a rise in interest rates and alterations to the UK tax system. The new CGT rate will significantly impact profitability for landlords and investors when they come to sell their properties.
Industry reports show that the amount of buy-to-let property investors exiting the market has been consistently growing over the last few years. According to the Royal Institution of Chartered Surveyors’ (RICS) May 2023 report, the number of new landlord instructions had decreased by 23% since the start of this year.
As the looming Capital Gains Tax threshold of 2024/25 draws nearer, more and more buy-to-let investors are turning to auctions as a swift and efficient way to reorganise their portfolios. With this comes a rise in property availability, making auctions an attractive option for those who are looking to purchase for long-term gain and acquire properties at competitive prices.
Jeremy Prior, Managing Director of Auction House, commented: “As auctioneers, we’re having to contend with a toxic combination of increasing interest rates and decreasing levels of confidence. However, the underlying belief in bricks and mortar as a secure medium to long term investment remain and there are some fantastic opportunities out there for the canny investor.”
Interested in learning more about buying and selling property at auction? Contact Auction House today.
