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Landlords could be targeted in new Capital Gains Tax raid

2-minute read

Mollie Millman

19 November 2020

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Landlords could be hit by another massive tax raid, as the Office of Tax Simplification outlines its recommendations for an overhaul of Capital Gains Tax.

In the summer, the government asked the Office of Tax Simplification (OTS) to look at whether Capital Gains Tax was fit for purpose and whether it could be simplified.

The OTS has given its conclusions in a new report, which among other things has called for an increase in Capital Gains Tax so that it’s in line with income tax rates.

What is the current rate of Capital Gains Tax?

Capital Gains Tax is a tax on the profit of an item sold that’s increased in value. It’s the gain that’s taxed, rather than the amount of money received.

In this way, the tax is levied on gains made from the sale of second homes and buy-to-let properties – but not main residences.

Capital Gains Tax has traditionally been taxed at lower levels than income tax. On the sale of second homes, the rates are currently 18 per cent for basic rate taxpayers and 28 per cent for higher rate taxpayers.

The report recommends an increase in Capital Gains Tax

The OTS recommendations, if implemented, would see the tax rate on capital gains for buy-to-let properties rise to 20 per cent for basic rate taxpayers.

The rate for higher rate taxpayers would rise to 40 per cent.

A reduction in the annual allowance

The OTS report also calls for a big reduction in the annual tax allowance.

The annual amount that’s exempt from Capital Gains Tax currently stands at £12,300. This could be lowered to as little as £2,000 under the proposals.

Tax raid could lead to a rise in rents

Experts warned that the proposals could hit landlords hard. They claimed that it could result in some landlords leaving the sector – something that would push up rents amid a reduction in supply.

Tom Selby, senior analyst at AJ Bell, said: “Landlords would be among the biggest losers from a capital gains tax hike, as second properties are subject to the tax when they are sold.

“Because second homes can’t be held in a pension or ISA and are difficult to sell in small chunks to take advantage of the annual exemption, a disposal is more likely to generate a significant capital gains tax bill.”

Timothy Douglas, or ARLA Propertymark, said: “Letting agents and their landlords play a key role in maintaining a strong and thriving private rented sector.

“Given recent changes to mortgage interest relief, the wear and tear allowance, and the ongoing impact of Covid-19, the government must tread carefully with any plans to change capital gains tax as this could dramatically reduce the supply of rental properties.”

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