Capital gains tax (CGT) is a tax levied on the profit you make when you sell an asset that has increased in value. Currently, there is an annual exemption of £12,300, which means that you only have to pay CGT on any profit you make above this amount.
However, from next year, the exemption will be cut to £6,000, and then halved again to just £3,000 from April 2024. This will result in a significant tax bill for many landlords who are looking to sell their properties.
Landlords making more profit than the threshold when selling properties will be taxed at a rate of 18%, or 28% for higher-rate taxpayers.
Research by the estate agent Hamptons has shown that the average landlord who sold their buy-to-let property in England and Wales this year did so for £98,050 more than they paid for it. After deducting 10% for costs, this would leave the average higher-rate taxpayer with a £21,264 CGT tax bill.
However, from April next year, the threshold for CGT will be reduced to £6,000, meaning that the average higher-rate taxpaying landlord will have to pay an extra £1,764 in tax. And from April 2024, the average higher-rate taxpaying landlord will pay £2,604 or 12% more in CGT when selling.
With house prices as they are today, these changes could have a significant impact on the profitability of buy-to-let investments.
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