Current capital gains tax (CGT) rates are too complex and should be aligned with those for income tax, according to a new report from the Office for Tax Simplification (OTS) – what could this mean for landlords?
CGT has been a political football for years. Those who own and invest in property regard it as a punitive burden. Others, meanwhile, see an opportunity to target tax rises at the relatively well-off.
With the Government currently spending freely to prop up business and the economy as the coronavirus crisis rumbles on, could an increase in CGT be one of the ways the Chancellor intends to pay for it?
We’re expecting a full budget from him next spring, in around March, which will set out the Government’s plan for covering the gargantuan debt it has incurred during 2020 as a result of the pandemic.
With that in mind, the timing of the OTS’ report makes sense:
- They make their recommendation in November 2020.
- A consultation is announced alongside the Chancellor’s economic update scheduled for 25 November.
- The results of that consultation are released alongside the Budget.
What’s the problem the OTS wants to solve?
The OTS was founded by the then-chancellor George Osborne, charged with finding ways to make the UK tax system less complicated.
In July 2020, Rishi Sunak asked the OTS to look at CGT in particular, saying:
“I would like this review to identify and offer advice about opportunities to simplify the taxation of chargeable gains… In particular, I would be interested in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income.”
CGT in the UK is charged at 10% and 20% for most taxable assets, or 18% and 28% for residential property other than primary residences – including rental property.
Meanwhile, income tax in England, Northern Ireland and Wales is charged at 20%, 40% and 45%, depending on your earnings.
What is the OTS recommending?
The OTS said in its report that…
“The rate disparity can distort business and family decision-making and it creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains. Most gains are concentrated among relatively few taxpayers, who also tend to have more flexibility about when they dispose of their assets. This can mean they pay proportionately less tax on their overall income and gains than others.”
It argues that putting CGT rates in line with income tax rates could raise an extra £14 billion each year for the Treasury, amounting to £70bn over a five-year period.
Most of that extra would, of course, come from people who own more than one property, whether they’re second-homers, Airbnb owners or residential landlords.
The OTS has also suggested reducing the £12,300 annual CGT tax-free allowance, giving an example of a £5,000 threshold as an alternative.
Set at that level, twice as many people would end up paying CGT.
Do landlords need to worry?
First things first: the Chancellor doesn’t have to go along with the report’s suggestions. The final decision is his.
In fact, experience suggests that if there’s enough outcry – especially from the kind of people whose votes his party might want to win at the next election – he’ll probably either ignore them, or come up with a compromise.
At the same time, we know he’s looking for ways to claw back some of the £210bn spent on coronavirus support. Because CGT only affects a relatively small number of taxpayers – about a quarter of a million people – it might be seen as a relatively easy target.
If the change does go through, though, it will be a significant hit for landlords.
Even before the coronavirus pandemic the Government had effectively increased the tax on landlords by:
- restricting lettings relief to limited circumstances
- by decreasing the exempt period after leaving a main residence from 36 months (in most cases) to nine months before the date of disposal.
What’s more, since 6 April 2020, any CGT due has to be paid within 30 days of the completion of the sale of a residential property.
Under the proposed changes, for basic-rate taxpayers, the tax on profits from rental property sales would rise from 18% to 20%. It might not sound like it, but that’s a big jump.
Higher-rate taxpayers will really feel the sting, though, with tax on gains from the sale of investment properties leaping from 28% to 40%.
And for additional-rate taxpayers, the new rate will be 45% – potentially increasing a CGT bill by 60% in future years.
All any of us can do now is wait to see what the Chancellor decides – and perhaps, if you’re so minded, write to your local MP.
It goes without saying that we’ll be watching this closely and will keep you updated.
If the Chancellor does accept the recommendations as they are, we’ll be on hand to advise UK Landlord Tax clients on their options in the run up to new rates taking effect.
In general, though, we’ve always been strong advocates of resisting the urge to sell. Rental property continues to be a great long-term investment and higher rates of CGT would only make that all the more true.
Talk to us about capital gains tax and the sale of rental properties.