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Landlords running scared of regulation fuel record-high tax take

·4-min read
capital gains tax threshold second homes buy-to-let treasury
capital gains tax threshold second homes buy-to-let treasury

A crackdown on buy-to-let properties and soaring house prices have helped the Treasury collect the highest amount of capital gains tax on record.

Tax paid on capital gains soared 42pc to £14.3bn in the tax year just ended, new figures show. A decade ago, just £3.8bn was collected by HMRC.

An all-time high of 323,000 people were forced to pay the duty during the period, with the average bill hitting £44,272.

Experts said the surge could be put down to landlords abandoning the buy-to-let sector and second home owners cashing in on the pandemic property boom while stamp duty was scrapped. The average property price jumped by 10.2pc in the year to March 2021, according to the Office for National Statistics.

The Government’s crackdown on landlords has included a tax relief cut on buy-to-let mortgages, a 3pc stamp duty surcharge on additional properties, and a series of other regulations including the tenant fee ban.

In 2020, more than 130,000 landlords sold their buy-to-let properties following increased regulation, with a further 201,000 selling up in 2021.

Heather Powell of tax firm Blick Rothenberg said: “There has been a lot of increased regulation in the market, including a change in rules regarding evicting tenants and the deduction of interest against rent. Landlords are also fearful that the capital gains tax rate could go up while house prices are not rising so fast.”

The money made by the Government from CGT, which is typically charged at up to 28pc on residential property and 20pc on other assets, has increased every year bar two since the financial crisis.

Taxes collected on the sale of investments and second homes are now expected to rocket further by another £6bn, rising to £20.7bn by 2026, according forecasts by the Office for Budget Responsibility.

CGT is a tax on the profit when you sell some assets – including businesses and second homes – which have increased in value. Those selling investments outside an Isa are also subject to the levy.

Income tax bands determine whether sellers pay capital gains tax at 10pc or 20pc on their assets or 18pc and 28pc for property.

Tax experts have also blamed the surge on an Office of Tax Simplification report published in November 2020 that recommended the Government aligned CGT rates with income tax to generate an extra £14bn a year for the Treasury.

The proposal, which has not been enacted, would have more than doubled the rate of tax for those selling capital assets.

The Government yesterday said that some of the increased tax take could reflect “bringing forward disposals in response to anticipated tax rises”.

However, Shaun Moore, a tax and financial planning expert at wealth manager Quilter, said: “It did enough to spook people to bring forward their disposals ahead of any potential tax grabs. This recommendation is also likely to be entirely shelved until the next government decides what it is going to do with income tax rates as these seem firmly on the chopping block in order to help consumers.”

Chris Etherington, of tax consultancy RSM, added: “There is no doubt that fears over this change have pushed entrepreneurs to sell their businesses earlier than planned to remove the uncertainty around current tax policy from their succession planning. Entrepreneurs deserve better and need more clarity quickly.”

Mr Etherington also said young investors have been “coerced” into paying tax earlier as a result of the uncertainty.

The number of 25 to 34-year-olds paying capital gains tax doubled in the 2020/21 tax year, with the total paid rising 134pc to £221m. Some experts fear that many young entrepreneurs may have sold at an inopportune time as a result.

Mr Etherington said: "It is sometimes said that the ‘tax tail should not wag the investment dog’ but the Treasury’s policy on CGT, or lack of it, has dragged taxpayers on the leash to sell their assets."

Rishi Sunak froze the annual amount that is tax-free before CGT is applied at £12,300 for five years until 2026. The former chancellor also froze income tax thresholds.

Andrew Tully, of pension company Canada Life said that CGT was “clearly becoming a very valuable tax for HMRC”. He said: “The Government’s income has more than tripled in 10 years and this is likely to continue increasing.”

Net zero targets are also having an impact. As of 1 April 2020, landlords can no longer let properties that have an Energy Performance Certificate rating below E. This will rise again to band C by 2025.

A spokesman for HM Treasury said: "Capital gains tax remains an important source of revenue that helps fund vital public services. Most of the revenue comes from a small number of taxpayers making the largest gains, with 45pc coming from less than 1pc of payers, making gains of £5m or more."

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