Nikka Sulton

Landlords could face another tax increase this autumn, with warnings that changes to Capital Gains Tax (CGT) could have wider consequences for the rental market.

Tom Bill, head of residential research at estate agency and property consultancy Knight Frank, has warned Prime Minister Andy Burnham that increasing taxes on landlords could encourage more property owners to sell up. He also argues that this could put further pressure on rents if the supply of rental homes falls.

The warning comes ahead of the October Budget, with speculation continuing over whether the government could change the way Capital Gains Tax is applied to residential property.

Could Capital Gains Tax Rates Increase?

One of the changes being discussed is bringing Capital Gains Tax rates closer to Income Tax rates.

At present, residential property gains are generally taxed at CGT rates of 18% or 24%, depending on the individual’s circumstances. Aligning these rates with Income Tax could potentially mean gains being taxed at rates of up to 45%.

For landlords, this could significantly increase the tax bill when selling a property that has risen in value.

Bill said the possibility of aligning CGT and Income Tax rates would be bad news for some landlords. However, he also highlighted the potential impact on tenants if higher taxes encouraged more landlords to leave the private rented sector.

If fewer landlords remain in the market, the number of available rental properties could fall. With fewer homes available for tenants, competition for properties could increase and put additional upward pressure on rents.

Landlords Already Facing Higher Costs

The potential CGT changes come at a time when landlords are already dealing with significant changes to the private rented sector.

The Renters’ Rights Act, introduced in May, has changed the way landlords and tenants operate, while additional costs and regulatory requirements have increased concerns about the future profitability of some rental properties.

Some landlords have already chosen to leave the sector rather than continue under the new rules. Others have increased rents in an attempt to cover higher costs and reduce the financial risks associated with letting property.

This means another major tax change could add further pressure to landlords who are already reviewing whether their properties remain financially viable.

For landlords with large capital gains, the difference between paying CGT at 24% and potentially paying tax at a rate closer to 45% could be substantial.

Landlords Selling Could Face a Timing Problem

The potential timing of any CGT reform could also create problems for landlords who are currently trying to sell.

Many landlords who have already completed a sale will have paid CGT under the rates that apply today. However, those who have properties on the market but have not yet found a buyer could potentially be more exposed to a change announced in the autumn.

This could be particularly important for landlords selling flats, where finding a buyer has become more difficult in parts of the UK.

A property that remains on the market for several months could therefore leave its owner facing uncertainty over how much tax they may eventually have to pay on the gain.

For some landlords, this could create an incentive to accept a lower offer and complete a sale before any potential tax changes take effect.

The Impact on the Rental Market

The biggest concern is that higher taxes could have consequences beyond landlords themselves.

If more property owners decide to sell their buy-to-let properties, there could be fewer homes available to rent. This could make it harder for tenants to find suitable properties, particularly in areas where rental supply is already limited.

Higher rents could then become one possible consequence.

This creates a difficult balance for the government. Raising taxes on landlords could generate additional revenue, but it could also make property investment less attractive and potentially reduce the supply of privately rented homes.

Bill pointed to this potential unintended consequence, arguing that tenants could ultimately feel the impact if landlords sell properties and rental supply falls.

More Taxes on Property and Wealth?

The potential CGT changes are also part of wider speculation about how the government could raise additional revenue.

Bill suggested that the government may increasingly turn towards a range of taxes targeting property, assets and wealth.

This could include further changes affecting higher-value properties.

The government introduced higher council tax bands in last year’s Budget, and there has already been speculation that these could represent the beginning of broader changes affecting high-value homes.

Bill suggested that if high-value property is targeted again in the upcoming Budget, it could affect the gradual recovery seen in the prime London property market.

The concern is that repeated tax increases on property could make buyers and investors more cautious, particularly at the higher end of the market.

Why Landlords Are Watching the October Budget

For landlords, the October Budget could therefore be an important one.

A change to CGT rates would not necessarily affect every property owner in the same way. The impact would depend on factors including the property’s purchase price, current value, ownership structure and the amount of taxable gain.

However, the possibility of rates increasing means landlords may be reviewing their portfolios and considering whether they want to continue holding certain properties.

Those already considering selling may also be paying closer attention to announcements made by the government.

At the same time, landlords who remain in the sector may need to factor potential tax changes into future investment decisions.

What Could Happen Next?

There is currently no confirmed policy stating that Capital Gains Tax on residential property will be increased to match Income Tax rates.

However, the possibility is enough to create uncertainty for landlords and property investors.

Any decision would need to consider the government’s need to raise revenue alongside the potential effects on property transactions, investment and the private rented sector.

For landlords, the situation highlights the importance of keeping up with changes to taxation and rental regulations. A higher CGT bill could alter the financial calculations behind selling a property, while a reduction in rental supply could create further pressure on tenants and rents.

As the October Budget approaches, landlords will be watching closely to see whether CGT becomes part of the government’s wider plans for raising revenue.