Jeremy Hunt announced in the Spring Budget 2024 that the government will reduce the higher rate of Capital Gains Tax (CGT) due on sales of residential property from 28% to 24% from 6 April 2024. The lower rate will remain at 18%. Predictions were that CGT rates would, in fact, be increased to match Income Tax rates, so this will be welcome news for many.
The intention is that this will help the residential property market, by increasing the number of homes available for buyers looking to move home or get onto the property ladder, and support the many jobs that rely on this market. CGT rates have remained low compared to other taxes, and the government hopes that decreasing rates even further will incentivise second homeowners or those with buy-to-let properties, to dispose of these other properties earlier than they might have otherwise, especially where there are accrued capital gains on those properties, and they don't benefit from Private Residence Relief, which would apply on the disposal of a person’s main home.
In addition CGT reliefs for owners of furnished holiday let properties are ending from April 2025, to try and combat the housing shortage.
How CGT currently works
Gains on disposals of residential property (and that don't qualify for Private Residence Relief) are charged at the rates of:
- 18% for any gains that fall within an individual’s unused basic rate band (up to £37,700)
- 28% for any gains that exceed that basic rate band
These rates only need to be paid on gains which exceed the current CGT allowance of £6,000.
However, higher rate taxpayers, trustees and personal representatives all pay at the 28% rate on all gains from residential property disposals.
What will happen on 6 April?
- The higher rate of CGT due on sales of residential property will decrease from 28% to 24%
- The CGT annual exemption will decrease from £6,000 (in 2023/24) to £3,000 (in 2024/25)
The big question – to sell before 6 April or not?
Where clients had sales in the pipeline, we've had a number of enquiries about whether delaying the sale until after 6 April would be beneficial. Let’s consider Sharon and her holiday home in Devon. A sale has been agreed for £400,000. Sharon wants to know whether she should try to push the sale through before 6 April, or whether she can wait until after that date. She's a higher rate tax payer.
Sell before 6 April?
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Original purchase price
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£300,000
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|
Sale price
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£400,000
|
|
Net gain
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£100,000
|
|
Less annual exemption
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- £6,000
|
|
Taxable gain
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£94,000
|
|
Tax at 28% rate
|
£26,320 CGT to pay
|
Sell after 6 April?
|
Original purchase price
|
£300,000
|
|
Sale price
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£400,000
|
|
Net gain
|
£100,000
|
|
Less annual exemption
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- £3,000
|
|
Taxable gain
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£97,000
|
|
Tax at 24% rate
|
£23,280 CGT to pay
|
Sharon would save £3,040 CGT if she waits until after 6 April to complete on her house sale.
Summary
Whilst some view this 4% CGT reduction as a tax-break for wealthier second-home owners, the CGT annual allowance is also being reduced from £6,000 to £3,000, which means that consideration needs to be given as to whether an individual sale would make CGT savings or not after 6 April, even with the new lower rate of 24%. Where gains are small (for example, less than £20,000) and the bulk would be covered by the current £6,000 annual allowance, then it may be beneficial to exchange contracts ahead of 6 April. However, it would seem that overall, the 4% reduction will result in less CGT to pay for many sellers.
Anyone in the process of selling a house in the next few weeks, wanting to know whether they should sell before or after 6 April, should seek legal advice and a detailed calculation based on their own individual circumstances. Mills & Reeve can advise on all aspects of tax and estate planning, so please get in contact to discuss your options.
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