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Landlords face higher tax with freeze on capital gains tax allowances

2-minute read

Mollie Millman

12 March 2021

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Landlords face a growing tax burden following a freeze on capital gains tax allowances.

The Chancellor announced in the Budget last week that he would freeze the allowances as part of steps taken to raise funds to cover the cost of the Covid-19 pandemic.

By freezing the allowances, the Treasury can raise additional revenue. This is down to a phenomenon known as ‘fiscal drag’.

It’s a tricky concept to grasp, but fiscal drag is where the tax allowance thresholds get left behind by inflation. This drags more landlords into higher tax brackets.

It’s a way for the government to increase its tax revenue without actually increasing tax rates.

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Capital gains tax for landlords

Capital gains tax is paid by a landlord when they sell a property. The amount they pay is based on the profit or gain in the property’s value.

As such, it’s the gain that's taxed rather than the amount that the property is sold for.

The tax is applied on second homes and buy-to-let properties, but not on main residences.

Figures from the Office for Budget Responsibility show that the taxman’s takings from capital gains tax will rise.

As a result of the freeze in capital gains tax allowances – on all assets, not just buy-to-let properties – the taxman’s revenue will rise from £9.8 billion last year to £14.4 billion by 2026, a rise of 47 per cent.

Freezing tax allowances

Kevin Sefton, of personal tax app Untied, explained how fiscal drag will help boost the government’s tax take.

He said: "Effectively, the government is increasing its tax take by relying on inflation while keeping allowances the same.

"Multiple thresholds have been fixed up to 2026, including those relating to income tax, VAT, inheritance tax, pensions lifetime allowance, and capital gains tax."

Allowances and tax rates

The current thresholds for capital gains tax stand at £12,300 a year.

The rates on capital gains tax stand at 28 per cent for higher rate taxpayers and 18 per cent for basic rate taxpayers.

The government is said to be looking at bringing these rates into line with income tax rates, but has yet to announce anything further on this.

The change in rates, if implemented, would see the tax rate on Capital Gains made on buy-to-let properties rise to 20 per cent for basic rate taxpayers. Higher rate taxpayers would see the rate on residential property that’s not their main home rise to 40 per cent.

Are you affected by the changes? Let us know in the comments.

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