Capital gains tax allowances to be reduced this month

6th April 2023

In the Chancellor’s Autumn Statement in November 2022, he announced that Capital gains tax allowances will be reduced from April 2023 and then further reduced from April 2024. The government has defended the reduction in the CGT allowance, stating that it is necessary to ensure that everyone pays their fair share of tax and argues that the current allowance is “too generous”. So, what is changing and what do you need to know as a landlord?

Capital gains tax is payable when certain items are sold or disposed of and is applicable to land and property (which includes second homes and investment properties). Capital Gains Tax is calculated on the difference between what an item was acquired for and its value when it is sold (this can include properties subject to a gift or an undervalue). Certain allowable expenses can be deducted when calculating the tax due, for example, where property is concerned, this may include legal and surveying fees.

If you’re a higher or additional rate taxpayer you’ll pay:

• 28% on your gains from residential property
• 20% on your gains from other chargeable assets

What is the capital gains tax allowance?

Currently the Annual Exemption Allowance (AEA) for capital Gains tax is £12,300. From April 2023 this will reduce to £6,000. This will reduce further to £3,000 from April 2024. This is the tax free amount a person can receive annually where a capital gain arises before they have to pay capital gains tax.

Anyone considering selling or gifting an asset soon, should consider the timing of their disposal carefully and if required, seek advice as soon as possible. Our senior sales consultant, Adam, would be more than happy to discuss how the change will affect you and your investment.

It should also be considered that capital gains tax can be payable if incorporating as a private Landlord. With changes to Section 24 in recent years resulting in less favourable tax allowances for expenses such as mortgage interest, many Landlord have opted to change their ownership into that of a Limited Company. Capital gains tax is chargeable on this process though, so the balance of yearly tax saving needs to be considered against the one time payment made for the incorporation. This process will however “reset the clock” on future capital gain calculations, as when the property is sold to a new owner.

Will you be affected by the changes to the capital gains tax allowances?

The Government estimates that in the tax year 2023 to 2024 circa 500,000 individuals and trusts could be affected by these changes, increasing to 570,000 in the following tax year.

By the 2024/25 tax year, the Government estimates that an additional 260,000 individuals and Trusts may be liable for capital gains tax, that otherwise would not have, had these changes have not been implemented.

ISAs will remain unaffected and private residence relief (PRR) on main homes will remain. Where capital gains tax is not payable, where a gain of at least £50,000 is made, there is still a requirement to report this to HMRC.

Critics have argued that it will discourage investment and entrepreneurship, particularly at a time when the economy is still recovering from the effects of the pandemic. They have also expressed concerns that the reduction in the CGT allowance will disproportionately affect small businesses and entrepreneurs, who may be less able to absorb the additional tax burden. It remains to be seen how the reduction in the CGT allowance will play out in practice and whether it will achieve its intended goal of raising revenue for public services.