Landlords may face significant financial losses if an anticipated rise in capital gains tax (CGT) is implemented later this month.
Individuals who purchased properties in the last five years might encounter substantial financial setbacks, potentially realizing a loss in real terms if the tax increase occurs amidst ongoing inflation trends.
Analysis conducted for The Sunday Times reveals that the average landlord who sold their property in England and Wales this year had owned it for approximately 11 years. They recorded a gross gain of £103,640, which represents 70 percent of their original investment, as per Land Registry data evaluated by the property consultancy Hamptons.
However, with inflation rates soaring at 40 percent over that period, landlords’ real gains have been diminished to approximately £62,425. For those classified as higher-rate taxpayers, the applicable CGT on property sales stands at 24 percent, while basic-rate taxpayers face an 18 percent rate. Even with the full £3,000 CGT tax-free allowance, they would incur a tax bill of around £24,153, which diminishes their real gain to £38,272.
Should Chancellor Rachel Reeves adjust CGT rates to match income tax rates, as she is reportedly contemplating, higher earners would see their CGT rate rise to 40 percent. This adjustment would elevate the average landlord’s tax bill to £41,456, lowering their profit to just £20,969.
Highest Cash Gains
Property investors in London realized the largest average gross gains this year, at £320,300—more than three times the national average, according to Hamptons.
Investors in the southeast of England achieved average gains of £135,773, in contrast to landlords in Wales, who realized an average gain of £62,242, or approximately £24,750 for those in the northeast of England.
However, with increased gains comes a larger tax liability. For instance, a landlord in St Albans, Hertfordshire, who sold a property this year after an eleven-year hold realized an average gain of £285,167 according to Hamptons.
Assuming they were a higher-rate taxpayer and utilized their full £3,000 tax-free allowance, they would owe £67,720 in CGT. With a 40 percent CGT rate, this bill could nearly double to £112,866, resulting in a real gain of just £58,896 after accounting for inflation.
These calculations do not factor in any capital expenses landlords can deduct from their CGT, such as legal expenses and home improvements.
One Portsmouth landlord, who chose to remain anonymous, was preparing to sell a rental property damaged by a tenant in July. After investing £3,000 on repairs and replacing ruined carpets, she opted to re-let it. She expressed concerns that any increase in CGT could obliterate over half her earnings from the past eight years.
She purchased the two-bedroom property in 2016 for £147,000, and it has since appreciated to a value of £190,000, resulting in a gain of £43,000. As a higher-rate taxpayer with a £3,000 tax-free allowance, selling this year would incur a tax bill nearing £9,000, which could surge to £16,000 should CGT rates align with income tax.
“I was close to selling after several estate agents provided valuations. However, the estate agent fees of £2,700, solicitor fees of £1,200, and a £4,800 early repayment charge on my mortgage meant selling offered minimal financial benefit, especially if CGT increases,” she stated. After accounting for selling costs and potential tax liabilities, she would only retain £18,300 of her £43,000 gain.
Largest Percentage Gains
While the most substantial cash gains occurred in the south, the most significant percentage gains were recorded in northern England, presenting landlords with better chances of outpacing inflation.
The average cash gain for landlords in Manchester was £112,481, lower than the £135,773 realized by investors in the southeast, but the percentage gain of 113 percent was considerably higher.
Lawrence Copeland, an estate agent in Manchester, noted that long-term property holders expressed the most concern, as their potential gains are substantial.
“In the early 1990s, a new two-bedroom flat in the city center cost around £65,000. That same flat is now valued at about £270,000. Investors are anxious about losing a significant portion of their gains if CGT rates increase,” he remarked.
In Wales, investors selling buy-to-let properties this year saw the highest capital profits in Cardiff, with an average gross gain of £108,355 after approximately 12 years of ownership. Monmouthshire recorded the second-largest gains, where investors earned an average of £94,663.
While the Land Registry provides property data solely for England and Wales, a similar trend is observable in Scotland, where 19 percent of homes listed for sale in September were previously rental properties—the second-highest percentage in the UK, reported by Rightmove.
Retirement Strategies Affected
For many landlords, property investments serve as a component of their pension strategy, anticipating that market values will surpass returns from alternative investments, enabling property liquidation upon retirement. However, soaring inflation and potential tax hikes threaten this financial plan.
The average age of buy-to-let landlords in England is 58, according to the latest English Private Landlord Survey. Approximately 54 percent invested in properties as part of their long-term pension strategy.
Nimesh Shah from Blick Rothenberg expressed that landlords who selected property over traditional pensions are increasingly worried about substantial portions of their gains being taxed away by HMRC.
“This situation will likely compel many to reassess their investment and retirement strategies, with some feeling forced to hold onto properties due to the disincentive posed by higher CGT rates,” he noted.
Inflation’s Influence
The typical landlord who sold properties in England and Wales this year after holding them for one to five years made a cash gain of £47,533, equating to a 23 percent increase. Inflation since 2019 has tallied at 24 percent.
Aneisha Beveridge from Hamptons commented, “The considerable durations for which properties are owned, in addition to recent high inflation rates, suggest that landlords are being taxed on returns that barely exceed inflation.”
Previously available indexation relief for CGT was eliminated in 2008. Furthermore, income tax thresholds have been frozen since 2021, which pushes many investors into higher tax brackets, now subject to the 24 percent CGT rate on property sales, compared to 18 percent for basic-rate taxpayers.
“Adjusting these gains for inflation would ensure investors are only taxed on actual net returns,” she suggested.
Ways to Mitigate CGT Liabilities
When disposing of investment properties, sellers can minimize CGT liabilities by deducting applicable costs associated with purchasing, selling, or improving the property—collectively known as capital costs.
These costs include commissions for estate agents, legal fees, stamp duty, and expenses related to significant property upgrades, such as extensions or renovations.
However, there lies a distinction between capital costs, which are tax-deductible under CGT, and revenue expenditures, which can only be deducted from income tax. For instance, expenses for routine repairs or replacements of appliances do not qualify for CGT deductions.