Is a tax cut for buy-to-let landlords on the cards? Calls for capital gains tax to be slashed after hike LOWERS revenue
Buy-to-let landlords who have made big profits from rising house prices and investors with substantial portfolios could get a tax cut, if George Osborne listens to fresh calls to slash capital gains tax – after a report claimed increases failed to boost revenue.
Official figures examined by the Adam Smith Institute revealed that putting up the rate of capital gains tax (CGT) in 2010 for most people has actually cost the Treasury income.
Its report says that people are holding on to assets – such as buy-to-let properties or shares – rather than selling them, to avoid the higher tax rate.
Osborne raised CGT from 18 per cent to 28 per cent for most taxpayers in June 2010, nearly three months into the tax year. This was announced in his emergency budget and came in with immediate effect. That unusual timing means the impact of the change can be easily measured.
Figures from HM Revenue & Customs show a 76 per cent drop in transactions that attract CGT, and a 64 per cent reduction in tax paid.
If the figures had run across a full year the amount raised by the levy would have plunged from £6.9billion to £2.5billion.
The report said: ‘Clearly, many people sought to realise gains before the rate increased, knowing that the Coalition Agreement committed the Government to a sharp increase in CGT rate.
‘CGT is effectively a voluntary tax, paid only when people choose to dispose of assets. If they perceive rates to be too high, they choose to keep assets.
‘The Adam Smith Institute is urging the Government to slash CGT rates to pre-2010 levels, which would raise more revenue for the Treasury and also stimulate growth.’
While the amount of money coming in from CGT receipts has increased since 2011, the think-tank insists income would be far higher still if the rate had stayed the same.
The report fuelled calls by Tory MPs, including Adam Afriyie and Brian Binley, for the Chancellor to slash taxes in the Budget next month.
A Treasury spokesman said: ‘In 2010 the Government introduced a higher rate of capital gains tax to reduce the incentives to substitute income for a capital gain to avoid income tax, a practice that was costing other taxpayers up to £1billion a year.’
How capital gains tax works and was slashed only to rise again
Alistair Darling: Former Chancellor cut CGT in 2008
Everyone has an annual capital gains tax allowance, £10,600 in 2012 to 2013, any profits you make on the disposal of an asset above this incur CGT.
Some assets are exempt, such as your car, personal possessions disposed of for £6,000 or less and, usually, your main home.
From April 2008, CGT was cut from a whopping 40 per cent to just 18 per cent by then Chancellor Alistair Darling.
The cut in CGT was mainly aimed at delivering a low flat tax rate which everyone would pay, rather than find loopholes to dodge. One of the targets at the time were wealthy private equity bosses who were using loopholes to enjoy a 10 per cent rate.
It also aimed to simplify a tax that used a complicated stepped system based on how long people had held assets to work out their ultimate bill.
Under the previous system a taper that began after three years of ownership allowed the 40 per cent rate to fall two per cent for every year you owned the asset, up to a lower limit of 24 per cent.
A buy-to-let landlord, for example, who held onto a property for seven years would have see an 8 per cent drop, and would have paid 32 per cent CGT under the old system.
Once someone had owned an asset for ten years the lowest possible CGT rate of 24 per cent was incurred on profits above the CGT-free threshold.
Tax experts said at the time of the cut that it was a major tax break for second home owners and saved them thousands of pounds when they sold their property.
However, two years later, George Osborne in an emergency budget increased CGT to 28 per cent for higher rate taxpayers.
Osborne also chose not to reintroduce a taper relief system that would have seen tax breaks for those holding assets over the long-term, such as the system before.
The sneaky trick in capital gains tax that means you pay 28%
Osborne’s change had a sneaky caveat. There is still an 18 per cent rate of CGT for basic rate taxpayers, however, they are clumped into the higher taxpayer bracket if a profit above their CGT-free allowance plus their income pushes them over the threshold.
For example, if you earn £20,000 but the asset you sell, say a buy-to-let property, makes a £50,000 profit, you will be charged the higher 28 per cent rate.
This is because once you take the £10,600 CGT allowance off the £50,000 profit, an investor still has a £39,400 profit. This is added to their £20,000 salary to deliver a total of £59,400, sending them over the higher rate tax threshold and meaning that they pay 28 per cent CGT above this.
Essentially, the new system while maintaining an 18 per cent CGT band actually means that most people in salaried employment who make a substantial gain will end up facing 28 per cent tax.
This has led to people holding onto assets rather than sell them, according to the Adam Smith Institute.
Ways for buy-to-let owners to pay less capital gains tax
Second property: CGT kicks in on properties owned that are not your ‘principal’ residence
CGT kicks in when you sell a buy-to-let property at a profit of more than £10,600. It applies to any property which is not your main home, known as your Principal Private Residence.
If you only have one property and it is considered your principal home, then you do not have to pay CGT, however, the taxman may want evidence that you were actually living there.
Stamp duty is payable on buy-to-let properties by the purchaser, as with all other residential properties. Crucially, buy-to-let investors can deduct this from their CGT bill.
The current rates are one per cent above £125,000, three per cent above £250,000, four per cent above £500,000, five per cent above £1million and seven per cent above £2million.
Te HMRC website says: ‘If you’ve spent extra money to buy, sell or improve your property, you can deduct certain costs’ – and this includes stamp duty and VAT.
Other fees that can be deducted are fees or commission for professional advice or services, for example, CGT valuations, solicitors’ and estate agent or advertising fees
Also improvement costs to increase the value of the property – but not normal maintenance costs such as repairs or decorating.
Buy-to-let owners and those with second homes can slash tax bills if they have ever lived there as their principal private residence.
Special rules apply to properties that have been a main residence. The period when it was the main residence is exempt, plus the last 36 months of ownership.
An unmarried couple may each own a home that qualifies as their principal residence but a married couple may only nominate one property and must elect jointly.
It is possible to cut capital gains bills by living in the second property for a period of time and through lettings relief.
For those who have previously rented out their main residences there is the added benefit of being able to claim up to £40,000 letting relief. This is available to anyone with a share in the property – giving a couple, even if married, up to £80,000 between them.
The amount of private letting relief that can be claimed cannot be greater than £40,000 and must be the lower of that sum, the amount of principal private residence relief being claimed, or the capital gains made during the letting period.
Essentially, CGT for landlords who have lived in their property is complicated but can be substantially reduced.
Anyone making a substantial sum from selling a property should seek out professional advice and pay a fee for it, this should allow them to take advantage of all available breaks.
Ways for investors to pay less capital gains tax
It’s important to remember that you are only taxed on profits, not the value of the sale. For example, if you buy shares for £10,000 and then sell them for £20,000, that’s a £10,000 profit. This is within your annual allowance.
However, if you make another gain of £1,000 in the same tax year and you go over £10,600, this amount would be liable for tax.
Investing in an Isa is one of the best methods of avoiding CGT. Gains on investments inside an Isa sit outside of the CGT system, this cuts both tax and paperwork.
Another option is to transfer part your portfolio to your spouse. Transfers between spouses are not taxed, so you can both take advantage of the annual CGT allowance. This effectively doubles the CGT allowance for married couples.
Lastly, if you are able to drip-sell your investments over a period of time, you can also avoid CGT by not crossing the threshold.
Article courtesy of This is money