CGT is going up – what does this mean for property and the BTL market?
For several weeks now landlord clients have been fretting. The buy-to-let market has already been under strain this year. In the first quarter of 2024, only 41,149 new buy-to-let loans worth £7.0 billion were issued—a 17.3% drop in value compared to the same period in 2023. Landlords have recently discovered that the new government will require them to upgrade their properties, and there has been much talk of a CGT hike – possibly to as high as 39% (which the government has since denied) and even the country’s biggest mortgage lender has come out in support of landlords.
Read more: Big lender comes out in support of landlords
Talk of a government CGT grab has already caused a rush for the exits, sparking what some are calling a ‘frenzy’ of sales to avoid a much talked about CGT tax rate hike. That hike talk has already given the government an unseasonal CGT bonanza. But the experts have been speaking up and letting Reeves know that not only could the country lose nearly one million rental homes but a hike might actually, according to this report, cost the government over £3 billion in lost tax revenue.
But in breaking news – it looks like the government has taken advice, and backed away from anything too extreme – and maybe this ‘leak’ is an attempt by the Starmer government to stop speculation putting a serious dampener on the market.
According to sources quoted by The Times, Rachel Reeves does plan to raise capital gains tax (CGT) on the sale of shares and other assets - though the sources say that thankfully the tax rate for second homes will remain unchanged. According to the reports, the CGT rate on share profits, currently at 20%, could rise by several percentage points.
Read more: Could Reeves shutter one million rental homes?
Within the government, there have been discussions about more aggressive increases, but concerns have emerged that sellers might delay asset sales to avoid higher rates, effectively slowing tax receipts. Reeves also aims to close certain reliefs within the current tax framework to generate more revenue, in an attempt to stabilise public finances without reverting to austerity measures. A government insider told The Times that the revenue generated from the CGT hike could be in the “low billions”.
Despite these increases, CGT on second homes and buy-to-let properties will stay the same, as officials worry that higher rates could reduce revenues. In a previous budget, the Conservative government lowered the CGT rate from 28% to 24%, which, according to the Office for Budget Responsibility (OBR), boosted property transactions and raised almost £700 million.
More than half of CGT revenue comes from share sales, while property sales account for just 12%. The tax only applies to profits exceeding £3,000, with exemptions for ISAs and self-invested personal pensions (SIPPs). Although around 12.5 million private investors own shares, only 350,000 pay CGT annually. Notably, most CGT revenue comes from the sale of private company shares, with average gains of over £120,000, compared to £18,000 from listed shares.
Recently, speculation was fuelled when the CEO of Next sold £29 million worth of shares, potentially in anticipation of the upcoming tax changes. While Prime Minister Sir Keir Starmer has confirmed the government’s intent to raise CGT, he dismissed speculation of a drastic increase to 39%, calling those figures “wide of the mark”, so maybe not that much, but still up.
Reeves needs to find £40 billion in tax increases and spending cuts to prevent austerity. However, the Treasury’s request for departments to prepare for significant cuts has caused friction within the cabinet. Senior ministers, including Deputy Prime Minister Angela Rayner and Justice Secretary Shabana Mahmood, have raised concerns over the potential impact on essential services. The Treasury clarified that asking departments to explore large cuts does not guarantee they will be implemented, and Reeves has stated there will be no return to austerity.
So even though landlords may be safe for now, others could face financial pain. Labour is also considering reducing the amount people can withdraw from pensions tax-free, from the current £268,275 to £100,000, which could raise £2 billion. However, doubts remain about whether these tax increases will raise enough revenue.
Only 12,000 individuals contribute two-thirds of the £15 billion collected annually through CGT, making revenues volatile and sensitive to taxpayer behaviour. A Treasury official warned that increasing CGT rates too sharply could backfire by discouraging sales, thus reducing revenue. "Large tax hikes can cut yield because of behavioural responses," they noted. HMRC also cautioned that raising CGT by 10 percentage points might ultimately lower income for the government.
The Institute for Fiscal Studies (IFS) suggested that any CGT increase should include broader reforms, such as taxing gains on assets passed down after death.
The Treasury’s decision to leave the CGT rate on second homes untouched follows OBR projections that the lower rate introduced in the spring budget would stimulate property sales and boost stamp duty revenue. The OBR stated that the reduction in CGT would “unlock” more sales and have a lasting positive effect on transaction levels, driving additional revenue through stamp duty.
A significant tax increase is also expected from the introduction of national insurance on employer pension contributions, which could bring in up to £12 billion. The proposal has come under fire from some quarters as they claim that this is a backtrack or breach of the new government’s election manifesto.
Reeves is reportedly examining inheritance tax and pension relief adjustments as further steps toward balancing the budget.
Capital Gains Tax (CGT) in the United Kingdom
Capital Gains Tax in the UK is applied to profits from the sale of non-inventory assets by individuals or trusts, such as shares, property, and valuable items. However, companies pay corporation tax on their gains rather than CGT. First introduced by Chancellor James Callaghan in 1965 to address rising property values and speculation, CGT targets investors, business owners, and those participating in employee share schemes.
Key exemptions and allowances:
- Private residence relief: Excludes a person’s primary home from CGT.
- Personal possessions exemption: Covers items valued below £3,000.
- ISAs and pensions: Investments in ISAs or some pension schemes are exempt.
- Annual exempt allowance: Currently, individuals can make £6,000 (reducing to £3,000 in 2024) in gains without tax liability.
CGT rates and evolution
From 1965 to 1988, CGT was set at 30%. Over time, rates were aligned with income tax and further revised. By 2016, new rates of 10% for basic-rate taxpayers and 20% for higher-rate taxpayers were introduced, though gains from residential properties face higher rates of 18% and 28%. Reliefs such as Entrepreneurs’ Relief—now called Business Asset Disposal Relief—offer reduced tax rates on certain business assets, albeit with capped lifetime limits.
Reporting and compliance:
Gains must be reported to HMRC either through Self Assessment or real-time reporting services. For residential property sales, special reporting deadlines apply (30 or 60 days, depending on the sale date).
Trends and demographics:
Most CGT is paid by older individuals (55+), with large gains increasingly concentrated among a small group of taxpayers. Recent adjustments aim to prevent exploitation of reliefs while promoting fair taxation and public revenue growth.
