Chancellor Rishi Sunak has sparked fears that capital gains tax (CGT) will rise for landlords as part of the government’s plan to pay for borrowing billions to stave off the economic effects of the coronavirus crisis.

Sunak even surprised his own backbenchers after ordering a review of how CGT works from the independent Office for Budget Responsibility.

CGT raises around £9 billion a year for the Treasury – but the figure is set to drop if house prices and shares slump in value.

The review will look at how CGT is calculated on the sale of homes, stocks and shares and fine art.

What is CGT for landlords?

Capital Gains Tax or CGT for short is a tax on the profit a landlord makes on the value of a buy to let, second home or other investment property.

CGT does not apply to the sale of a main home.

Like income tax, CGT comes with a set of reliefs and allowances that reduce the amount of tax due.

Any sales raising a gain of less than the 2020-21 annual exempt amount of £12,000 are tax-free.

The annual exempt amount changes each tax year, generally in line with any rise in the cost of living.

Landlords paying income tax at the highest rates (40%/45%) pay CGT at a rate of 28%, while those paying at lower rates pay CGT at 18%.

How much CGT is paid each year?

CGT comes to £9.1 billion a year, which is just 1.1% of all taxes collected by the Treasury. Most comes from property sales.

What is the CGT review?

Sunak wants to check that CGT rates compare with those of other taxes and that the rules do not encourage tax avoidance.

The Treasury argues the review is unlikely to trigger a major policy change, but it’s difficult to see how rates won’t rise when taking a broad view of the tax landscape.

In their election manifesto, the Tories pledged not to increase income tax, national insurance or VAT, so Sunak has few places to look to raise much-needed funds to balance the books after borrowing billions to keep the country going during the COVID-19 lockdown.

The Chancellor is also aware of a tax imbalance between the wealthy who tend to own investments and a typical worker as CGT rates are lower than income tax rates.

How could CGT change after the review?

The review is likely to promote three tax options for the Chancellor:

  • Raise CGT rates

Scrapping the lower rate or combining the rates into one higher rate could be in the Chancellor’s mind

  • Abolish or adjust CGT reliefs and allowances

CGT reliefs for landlords include the cost of buying and selling, improvements and some other costs which minimise the tax bill

  • Bring other assets into the CGT regime

The rules could extend to the disposal of private homes in the same way as stamp duty is charged on the purchase

The Chancellor can mix any of the option or even scrap CGT in favour of a broader wealth tax.

Some countries impose an annual tax charged as a percentage of personal wealth. This is seen as fairer than CGT by many. Similar taxes already exist in Norway, Spain, and Switzerland

An in-depth review by think-tank the Institute for Public Policy Research (IPPR) in September 2019 called for slashing the annual exempt allowance to £1,000 a year and landlord CGT rates pushed to as high as 45%.

Those proposed changes would raise up to an extra £90 billion for the government over five years.

When could CGT rules change?

Other tax reviews have taken nine months or more, so it seems unlikely CGT rules will change a lot in the Chancellor’s Autumn Statement, which is expected in November.

What should landlords do?

Making sweeping changes to the structure of a property portfolio is expensive and probably self-defeating until the Chancellor reveals any tax changes – and he may decide to do nothing.

One cost-effective area to look at is if changing property ownership ratios between spouses is worthwhile.

CGT transfers between spouses are tax-free and can save money for couples if one is a basic rate income taxpayer and the other a higher rate taxpayer.

For landlords thinking about moving their property business into a corporate structure, making the leap now is tempting as companies pay no CGT on gains. Instead, gains come under corporation tax rules.

CGT review for landlords explained FAQ

Here are the answers to the most asked questions from landlords about the Office of Budget Responsibility’s CGT review:

What can landlords do to protect their profits?

The CGT review only affects gains on property sales and not profits from rents. Until the Chancellor announces the changes, landlords should sit tight as he may decide to leave things as they are.

Will any CGT changes impact non-resident landlords?

Landlords living abroad follow the same CGT rules as those in the UK and this is unlikely to change.

How do landlords work out CGT?

HMRC has an online CGT calculator that gives a broad view of how much CGT a landlord is likely to pay on a property disposal. Beware – you will need some information about claiming reliefs and allowances to get an accurate forecast.

Why is the Chancellor tinkering with CGT?

Rishi Sunak needs all the money he can raise from taxes to bankroll government borrowing during the COVID-19 crisis and to pay for planned infrastructure projects.

Making the wealthy pay more tax is also popular with voters.

How can landlords have a say about the review?

Once the review ends, the government is likely to consult on any major changes to the rules. The consultation will be open to the public to comment.

Meanwhile, landlords can write to their MPs or the Chancellor. The OBR sometimes runs consultations as well.

Find out more

Read Chancellor Rishi Sunak’s letter to the Office of Budget Responsibility

Read CGT guidance on the government web site

Read about the Office of Budget Responsibility and CGT