CGT on Property: Impact of the UK Budget 2024

The Autumn Budget of 2024 introduced several changes that directly impact Capital Gains Tax (CGT) on property, which will be important for property investors, landlords, and homeowners to understand as we move into 2025.

With a focus on maximising revenue and addressing economic challenges, the government has made adjustments to CGT allowances and rates, aiming to tighten fiscal policy in response to inflationary pressures and the ongoing housing supply crisis.

This blog outlines the CGT changes on property in the 2024 Budget, exploring the implications for property owners, potential investors, and the overall property market.

What is CGT and Why It’s Important in Property Transactions

Capital Gains Tax (CGT) is a tax on the profit made when an individual sells an asset that has increased in value since its acquisition. The tax is applied only to the gain, not the total sale price. In the context of property, CGT applies when someone sells a property that isn’t their primary residence, such as a buy-to-let or a holiday home, and has increased in value since they bought it.

As property prices in the UK have generally appreciated over time, CGT can represent a significant expense for property owners looking to sell. In recent years, CGT has become an increasingly prominent source of revenue for the UK government, especially as rising property values generate substantial gains on disposals.

Key CGT Changes in the 2024 Budget

In the Autumn Budget of 2024, the Chancellor announced specific changes that will affect CGT on property. Here’s a concise breakdown of the changes:

Reduction of Annual CGT Exemption: The annual CGT exemption, or the amount of gains individuals can realise tax-free, was reduced from £6,000 to £3,000 starting in April 2024. This follows a reduction from £12,300 to £6,000 in the previous year, marking a significant drop from prior levels.

CGT Rate Increase: While CGT rates were left unchanged in 2023, the 2024 Budget introduced an increase in rates specifically for property gains. For basic rate taxpayers, the CGT rate on property has increased from 18% to 20%, while higher and additional rate taxpayers now face a rate of 30%, up from 28%.

Extended Payment Window: The time frame to pay CGT on property sales has been shortened, with property disposals after April 2024 requiring CGT payments within 30 days, a reduction from the previous 60-day deadline.

These changes reflect the government’s intention to increase revenue from property gains, particularly as CGT receipts reached £18 billion in the 2022-23 fiscal year, up from £12 billion in 2020-21. Property-related CGT, which accounts for nearly 40% of all CGT receipts, will be even more significant as a revenue source going forward.

Impact of the Changes on Property Owners and Investors

Impact on Individual Property Owners

The reduction in the annual CGT exemption means individuals who sell a property after April 2024 may face a larger tax bill. For example, someone selling a property with a gain of £15,000 would have previously paid CGT on £9,000 (after the £6,000 allowance). Under the new allowance, they would now pay CGT on £12,000, a notable increase in their tax liability.

With the rate hike, property owners paying at the higher tax rate would see an increase from 28% to 30%, which translates to an additional £200 in tax per £10,000 of taxable gain. This could impact landlords and investors with significant property portfolios, especially those considering selling high-value properties to take advantage of previous rate thresholds.

Impact on Buy-to-Let Investors

For buy-to-let investors, the combination of the reduced allowance, higher CGT rates, and the shortened payment window poses a new set of challenges. Property investors are already dealing with several fiscal measures affecting profitability, such as mortgage interest relief restrictions and higher Stamp Duty Land Tax on additional properties. The rise in CGT adds to this list, reducing the profitability of buy-to-let as an investment strategy.

Investors who plan to sell properties in the near term may face lower net returns due to the increased tax burden, potentially deterring some investors from entering or remaining in the buy-to-let market. This may contribute to an ongoing trend of smaller investors exiting the buy-to-let sector, which could further tighten the rental supply, increasing rental prices across the UK.

Impact on Second Homeowners

Second homeowners who sell properties, such as holiday homes or investment properties, will also experience a greater tax liability. Given that holiday lets have become popular as domestic tourism surged post-pandemic, many owners may need to reconsider the cost-benefit of maintaining these properties, especially if they intend to sell them at a gain.

Broader Market Implications Going into 2025

Impact on Property Prices

The CGT changes may have a cooling effect on the property market, particularly in the investment and second-home segments. As selling becomes more expensive due to CGT increases, some property owners may delay sales, reducing the supply of properties on the market. This could help stabilise or even push up prices in certain areas, particularly where demand outstrips supply.

Additionally, with higher costs associated with property investment, the buy-to-let market may see reduced demand, which could reduce competition in certain areas and create a softening effect on prices for investment properties. However, in areas with strong rental demand, landlords may pass on increased tax costs through higher rents, potentially exacerbating the affordability crisis in the rental market.

Changing Landscape for Property Investors

Investors, especially those managing larger property portfolios, will likely weigh these tax implications heavily in their investment decisions going into 2025. The increased CGT rates and the reduced allowance could deter some from selling properties, leading to a reduced churn in the market. For new investors, this higher tax burden on gains may lead to greater caution in market entry, with some opting for alternative investments with potentially lower tax burdens.

Potential for More Demand in Capital Gains Reduction Strategies

With these increased CGT liabilities, property owners may turn to strategies aimed at reducing CGT, such as transferring properties into family trusts or utilising CGT rollover relief. Additionally, the introduction of this higher tax rate may drive increased demand for qualified tax advisors who specialise in property investment, as investors look to optimise their tax strategies.

Looking Ahead: What Could Change in 2025?

The CGT changes implemented in the 2024 Budget could be adjusted based on how they affect both the property market and overall tax receipts. If the measures lead to significant dampening in the property market or reduce transactions to a level that hinders housing mobility, there could be pressure on the government to re-evaluate CGT policy.

Another potential area for reform could include adjusting reliefs and allowances for certain types of properties, such as those converted to rental units to help with housing shortages. Additionally, as ESG and sustainability measures become increasingly influential, the government may consider offering CGT relief on properties that meet certain environmental standards or efficiency criteria.

Conclusion

As these measures take effect, they may contribute to a cooling effect in certain segments of the property market, though rental demand and regional market dynamics will continue to drive property values in key areas. For property owners, 2025 presents an opportune time to review investment strategies, explore tax-efficient options, and consider long-term implications in light of the evolving CGT landscape. By staying informed and adapting to these changes, property owners and investors can better navigate the financial impacts of CGT and optimise their property portfolios accordingly.

The Autumn Budget 2024’s CGT adjustments mark a significant change for the UK property market, particularly impacting property investors, landlords, and second-homeowners. With a reduced CGT exemption, increased rates, and a shorter payment window, property owners face a tighter fiscal landscape going into 2025. These changes aim to generate additional government revenue while potentially reducing speculative gains in the property market.