CGT take soars – even BEFORE a potential rate hike by Rachel Reeves

Many buy-to-let mortgagees feel like they are under siege, and are reportedly selling up before a government tax grab. They are anticipating an increase in capital gains tax (CGT) rates in the upcoming October 2024 Budget, but early figures from HMRC suggest that the recent reduction in CGT rates for residential property sales from 28% to 24% as of April 6, 2024, may have actually boosted tax receipts according to RSM’s Chris Etherington.

In the four weeks leading up to September 14, according to Knight Frank, the number of new buyers was 15% below the five-year average, despite a higher number of sellers entering the market. Many sellers, especially those with buy-to-let properties or second homes, are eager to sell before any changes to CGT are introduced – and that rush to sell may well be boosting the new government’s coffers.

Despite the lower rate, CGT revenue for the period from April 1, 2024, to August 31, 2024, reached £854 million, up from £778 million during the same timeframe last year.

RSM say this rise could be partly due to a more active property market, spurred by expectations of upcoming interest rate cuts. It may also indicate that some sellers are offloading properties ahead of a possible CGT rate hike in the Budget. This pattern fits within a broader trend of more individuals paying CGT at the previous top rate of 28%, which applied to residential property sales and carried interest gains.

Over the last five years, CGT on property sales in the UK has undergone significant shifts, largely influenced by changing tax rules and economic conditions. A freedom of information request submitted by RSM UK to HMRC revealed that between 2016/17 and 2022/23, the number of taxpayers paying the higher CGT rate of 28% on residential property rose from 50,000 to 120,000. Over the same period, total CGT collected at the higher rate more than doubled, increasing from £1.58 billion in 2016/17 to £3.36 billion by 2021/22, though it dropped slightly to £3.04 billion in 2022/23, reflecting a slowdown in property sales.

Tax Year Breakdown:

It’s important to note that these figures include taxes paid on carried interest by private equity executives, who are also subject to the 28% CGT rate. While HMRC doesn’t provide a breakdown in these statistics, previous data from the Resolution Foundation indicated that around 2,000 individuals paid 28% CGT on carried interest in 2016/17 and 2017/18, contributing significantly to overall CGT receipts.

There are a number of factors that have contributed to the growth in CGT from residential properties. One factor is the freezing of tax bands and allowances, which, due to inflation, has pushed more people into higher tax brackets. This stealth tax effect, commonly associated with income tax, has also had an impact on capital gains tax.

Earlier this month, Chancellor Rachel Reeves hinted that difficult decisions lie ahead as she works to fill a £22 billion budget shortfall. Although she has expressed a desire to avoid tax rises that would hurt “working people” or discourage investment, Reeves has not ruled out raising CGT. This has sparked speculation that CGT could be increased to align more closely with income tax rates, a move that could significantly affect those with investment properties or second homes. 

Another factor has been rising mortgage costs and the reduced ability of landlords to offset interest expenses against rental income, which may have prompted some to sell their rental properties as interest rates have increased in recent years.

Analysing these trends alongside property transactions recorded by the Land Registry offers a clearer picture. The number of residential property transactions over £40,000 in the UK has fluctuated, reaching a peak of about 1.4 million in 2021/22 before falling to roughly 1 million in 2023/24. This variability reflects broader economic influences, such as changes in interest rates, housing demand, and governmental property policies.

Looking ahead, the true impact of potential CGT changes may still unfold. CGT receipts in the lead-up to the Budget, and following any potential rate increases, could indicate whether a wave of rental property sales will materialise, potentially providing the government with a much-needed financial boost.