One of the few pleasant surprises in the Autumn 2024 Budget was that the Chancellor did not increase the rate of capital gains tax on investment property and residential property gains, opting instead to bring the standard rates in line with the residential rates. The top rate applying to residential property gains once income and gains exceed the basic rate band remains at 24%, having been reduced from 28% to 24% from 6 April 2024. The rates are due to remain at 18% where income and gains are within the basic rate band and 24% thereafter for 2025/26. The annual exempt amount will also remain unchanged at £3,000.
Encouraging Property Sales Through Tax Adjustments
Arguably, the Chancellor’s intention here is to encourage second homeowners to sell and reinvest in something other than property; in her Budget, she also increased the stamp duty land tax supplement for second and subsequent residential properties from 3% to 5% with effect from 31 October 2024.
Of course, no one has a crystal ball, and it is impossible to know for certain what will happen in the future. However, against expectations, residential property capital gains tax rates were not increased, are currently lower than they have been in the past, and it may be the case that this is as good as it is going to get.
Challenges for Landlords and Second Homeowners
Many landlords may be thinking of selling. The climate for landlords is not what it once was. A raft of tax changes has cut into their profits, and the end of the favourable tax regime for furnished holiday letting eliminates further tax advantages. Changes to renters’ rights may also leave landlords deciding that they have reached the end of the road and that the time has come to sell their investment property or rental property. Second homeowners may also be thinking of selling.
The cost of having a second home is also likely to increase. From April 2025, councils have the power to charge a premium of up to 100% on council tax on second homes. These are defined as homes that are substantially furnished but which are not someone’s sole or main residence.
The Impact of Inflationary Gains
The problem for many landlords and second homeowners is that they purchased the property many years ago and are now sitting on a substantial inflationary gain. For many, at the time of purchase, relief was given for inflationary gains, and capital gains tax was payable only to the extent that the gain outstripped inflation. This is no longer the case, and when the investment property is sold, the gain is taxed in a single tax year when in reality it may have accrued over as much as 42 years (capital gains tax was last rebased in 1982). The annual exempt amount has also fallen and is now only £3,000.
While this may all seem very unfair, particularly if the gain would have been sheltered by unused annual allowances had it been taxed on an annual basis over the period of ownership, this is largely academic. While one may hope that the issue of inflationary gains will be addressed, in the current climate, this is perhaps wishful thinking.
Timing Your Investment Property Sale
While the old adage of not letting the tax tail wag the dog holds true, if you are thinking of selling an investment property or second home in the not-too-distant future, it may be worth thinking of doing so before 6 April 2026 while the top capital gains tax rate on residential property gains is 24%, as it may not get better than this.
Landlords exiting the FHL market can benefit from Business Asset Disposal Relief if they cease their business before 6 April 2025 and sell their properties within three years of the cessation date. With a rate of 10% until 5 April 2025 where BADR applies, this is a good deal.
You might also like to read: Calculating the capital gain on the sale of an investment property
Act Now to Maximise Benefits
Ultimately, planning when to sell your investment property can significantly impact the tax you pay. Acting while current rates and reliefs are in place could save you a considerable amount, particularly for long-held properties with substantial gains.
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