Considering Selling Your Investment Property?

Current Capital Gains Tax Rates

One of the more positive aspects of the Autumn 2024 Budget is that the Chancellor decided not to increase the capital gains tax (CGT) rates on residential property gains. Instead, she aligned the standard rates with the residential rates. From 6 April 2024, the top CGT rate for residential property gains, once income and gains exceed the basic rate band, was reduced from 28% to 24%. These rates are expected to remain at 18% for gains within the basic rate band and 24% thereafter for the 2025/26 tax year. Additionally, the annual exempt amount will stay at £3,000.

Incentives to Sell

The Chancellor aims to encourage second homeowners to sell their properties and reinvest in other assets. As part of this strategy, the stamp duty land tax supplement for second and subsequent residential properties increased from 3% to 5%, effective 31 October 2024.

Market Uncertainty

Predicting future changes is always challenging. Although residential property CGT rates were not raised as anticipated and are currently lower than in the past, this favorable scenario might not last indefinitely.

Changing Landscape for Landlords

Many landlords might consider selling their properties due to several factors. The profitability of renting has diminished due to numerous tax changes. The discontinuation of the favorable tax regime for furnished holiday lettings further reduces tax benefits. Upcoming changes to renters’ rights may also prompt landlords to reconsider their positions.

Impact on Second Homeowners

Second homeowners might also be contemplating sales. Starting April 2025, councils will have the authority to impose a premium of up to 100% on council tax for second homes. These are defined as properties that are substantially furnished but not used as a primary residence.

Dealing with Inflationary Gains

A common dilemma for many landlords and second homeowners is managing substantial inflationary gains from properties purchased many years ago. Previously, relief was available for inflationary gains, with CGT applied only on gains exceeding inflation. This is no longer the case. Currently, gains are taxed in the year of sale, even if they accumulated over several decades. The annual exempt amount has also been reduced to just £3,000.

Timing the Sale

While it may seem unfair, especially if annual allowances could have sheltered the gains if taxed annually over the ownership period, the reality is that this issue might not be addressed anytime soon. Therefore, if you are considering selling an investment property or second home, it might be wise to do so before 6 April 2026 while the top CGT rate on residential property gains remains at 24%.

Business Asset Disposal Relief

Landlords exiting the furnished holiday lettings market can benefit from Business Asset Disposal Relief (BADR) if they cease their business before 6 April 2025 and sell their properties within three years of cessation. This offers a favorable 10% CGT rate until 5 April 2025 when BADR applies.

Final Thoughts

In conclusion, while it is essential not to make decisions solely based on tax implications, the current CGT rates provide a potentially advantageous window for selling investment properties or second homes. Consulting with a financial advisor to explore your options and make an informed decision is always recommended.

For more details, please refer to the official government publication.

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