How Capital Gains Tax Rates Will Shift In 2024

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Capital gains tax (CGT) applies when you sell an asset at a profit, including property. The tax is levied on the gains and not the amount received. *According to the Chancellor’s Autumn Statement on 17 November 2022, the CGT rates and allowances are set to change in the 2024.  Based on the statement, Capital Gains Tax (CGT) exemptions would undergo a reduction starting in April 2023, followed by additional decreases from April 2024. Understanding the upcoming CGT shifts will enable informed property owners to maximise gains.

Overview of Capital Gains Tax

**CGT details to note:

  • This applies to gains when selling land, property, and other assets with a profit.
  • The tax is calculated on the profit amount and not the full sale price received.
  • CGT is charged at different rates for residential property and other assets.
  • Allowances, reliefs and exemptions are available to reduce CGT liability.

2023 – 2024 CGT Rates for Residential Property

The taxation rate for gains obtained from residential property differs from the rate applied to other types of assets. Not all residential properties are subject to this tax; it depends on multiple factors.

Setting aside those variables, here is the capital gains tax framework for residential property.

  • ***Basic Rate – This is 18%. This applies to total taxable gains only.
  • ***Higher Rate – This is 28% This applies to residential property gains only.

When Do You Not Pay CGT On Selling A Private Residence?

****CGT is not applicable if all the following conditions apply.

  • If you have purchased a house not just to make profit.
  • Unless you have dedicated a portion of your residence exclusively for business purposes (using a room temporarily as an office does not qualify as exclusive business use), this condition does not apply.
  • If you have not rented out a portion of your property, with the exception of having a lodger.
  • If you own just one home and where you have resided for the entire duration of your ownership.
  • The combined area of the property grounds, including all structures, must be less than 5,000 square metres, which is slightly over one acre in size.

How Will Capital Gains Tax Allowance Shift In 2024?

This will depend entirely on what the CGT rates end up being when announced in 2024. However, looking at previous years for comparison, the CGT allowance was reduced in 2023/24 and according to the Chancellor’s Autumn Statement on 17 November 2022, it will be further reduced in April 2024.***

  • Tax Year – 2021/22 – CGT Annual Exempt Amount for an Individual was £12,300 and CGT Annual Exempt Amount for Married or Civil Partnership Couples was £24,600.
  • Tax Year – 2022/23- CGT Annual Exempt Amount for an Individual was £12,300 and CGT Annual Exempt Amount for Married or Civil Partnership Couples was £24,600.
  • Tax Year – 2023/24 – CGT Annual Exempt Amount for an Individual was £6,000 and CGT Annual Exempt Amount for Married or Civil Partnership Couples was £12,000.

Annual Exempt Amount Limits Yearly Comparison*****

  • 2023 to 2024 – (£6,000) The yearly tax-free limit for individuals, personal representatives, and trustees looking after disabled individuals. £3,000 for other trustees.
  • 2022 to 2023 – (£12,300) The yearly tax-free limit for individuals, personal representatives, and trustees looking after disabled individuals. £6,150 for other trustees.
  • 2021 to 2022 – (£12,300) The yearly tax-free limit for individuals, personal representatives, and trustees looking after disabled individuals. £6,150 for other trustees.
  • 2020 to 2021 – (£12,000) The yearly tax-free limit for individuals, personal representatives, and trustees looking after disabled individuals. £6,000 for other trustees.
  • 2019 to 2020 – (£6,000) The yearly tax-free limit for individuals, personal representatives, and trustees looking after disabled individuals. £3,000 for other trustees.

Possible Impacts on Property Owners in 2024

Looking at the previous data on changes to the annual exempt amount limits and CGT allowance shifts over the last three years, if the CGT exemption rates are further reduced, it will impact property owners to a considerable extent.

Here are some possible impacts on property owners in 2024 if capital gains tax (CGT) exemption rates are further reduced in the UK.

  • Reduced incentive to invest in buy-to-let properties. With lower CGT exemptions, property investors would pay more tax on profits from property sales. This reduces the appeal of buy-to-let investments.
  • Downward pressure on property prices, especially for higher value properties. As property becomes less attractive as an investment, demand could fall, putting downward pressure on prices. This is especially true for higher value properties that would see a larger tax impact.
  • Rush to sell investment properties before new rules take effect. If changes are announced to take effect in 2024, there may be a spike in property sales as investors seek to sell under the current more favourable rules.
  • Shift from property to other investments. With lower property tax incentives, investors may shift capital to other asset classes like stocks and shares that don’t face the same tax changes.
  • Rise in rental prices. If lower CGT exemptions reduce buy-to-let investments, the supply of rental properties may fall. This could push up rental prices.
  • Financial pressure on individual property investors. Investors relying on property sales to fund retirement may be impacted by larger tax bills. This could force some small-scale landlords to sell.
  • Reduced CGT exemptions could cool property investment, reduce prices, especially at the high end, and shift investor focus to other assets. Rents and pressure on small individual landlords may rise as a result.

Possible Strategies To Minimise CGT Impact In 2024

Here are some potential strategies property owners could consider to minimise the impact if capital gains tax (CGT) exemption rates are further reduced:

  • Transfer property to spouse. As spouses are exempt from CGT, transferring a property into a spouse’s name before sale can avoid CGT. This requires planning ahead of proposed reductions.
  • Invest through a company structure. Companies have lower CGT rates than individuals, so owning investment property via a company can reduce the tax burden. However, stamp duty and other costs need to be considered.
  • Offset gains with other losses. Any capital losses can be offset against capital gains to lower an individual’s overall CGT bill. Actively realising losses could help minimise gains.
  • Reinvest in opportunity zones. Gains reinvested in designated opportunity zones within a set timeframe are exempt from CGT. This could defer tax to a later point.
  • Utilise allowable deductions. Costs like stamp duty, legal fees and improvement costs can be deducted from capital gains to reduce taxable profit. Maximising these deductions minimises CGT exposure.
  • Consider property gifting. Gifting property to family members can potentially reduce CGT, as the recipient takes over the property at the current market value rather than the higher original purchase price.
  • Review portfolio for high-gain properties. Selling properties with the highest potential capital gains first could crystallise gains at current lower tax rates.
  • Lobby government for exemptions. Landlord and investor trade groups could lobby the government to introduce exemptions for smaller-scale landlords to minimise impact.

Through careful planning, legal structuring, and portfolio management, property investors can take steps to reduce the impacts of any future CGT allowance reductions.

Conclusion                                       

The Capital gains tax rates 2024 changes will materially impact net gains when divesting property assets, especially for higher earners. Careful planning around disposals before the tax rise is advisable. Once the new regime commences, a focus on allowances, reliefs and tax-efficient structures will be key to optimising returns in the context of higher CGT rates. With informed strategies and advice, property investors can still generate strong after-tax profits from their property holdings despite the upcoming CGT shifts.

Source

*https://www.lovewell-blake.co.uk/news/capital-gains-tax-changes-a-summary

**https://www.gov.uk/capital-gains-tax

**https://www.gov.uk/capital-gains-tax/rates

**https://www.gov.uk/capital-gains-tax/allowances

***https://www.propertysolvers.co.uk/homeowners-hub/tax/capital-gains-tax-complete-guide/

****https://www.gov.uk/tax-sell-home

*****https://www.gov.uk/guidance/capital-gains-tax-rates-and-allowances#tax-free-allowances-for-capital-gains-tax

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