THE BLOG

Capital Gains Tax Changes: What Private Landlords Need to Know

05/02/2014 11:10 GMT | Updated 06/04/2014 10:59 BST

From April 2014, many landlords are set to face hefty tax bills following George Osborne's Autumn Statement announcing a rise in capital gains tax (CGT).

At present, the last three years of a rented property's capital growth is exempt from tax once sold, if the landlord once lived in it. After April this will be halved to just 18 months.

Those who are most likely to feel the pinch are small or "accidental landlords" who generally only have one property in their portfolio, which was once their main home. The level of extra tax these landlords will have to pay depends on the increase in value of the property and the time they spent living in it.

What will this cost?

Across 20 percent of London, house price inflation has been low enough that CGT was not payable before and will not be in April on a typical property. However, in Kensington prices have risen by 171 per cent in the last decade, meaning that come April a seller would have to pay an extra £54,000 in CGT per property!

One example of a landlord who will be left over £3,000 out of pocket once the changes come into force is Ryan Palmer. Ryan purchased a three bed property in Stratford, East London in 2008, hoping to take advantage of the Olympic Games. Unfortunately, what followed was the property crash and the Olympics came and went without the significant uplift in the capital value of the property he was hoping for.

Ryan decided to let the property after living in it for two years and having watched the market spring back into life is now left with no option but to sell his house to avoid excess tax due to substantial capital growth; the property valued at £225,000 six years ago is now valued at £375,000.

If he is unable to sell before April he will be forced to pay £3,248 - the equivalent of more than two month's rent.

Will the rental market change?

Although excess tax will cause annoyance, I do not predict this will impact on market trends as most property owners in London are expecting significant growth in property value over the next few years. This is likely to outweigh the down-side of higher taxation.

However, if you're one of many landlords like Ryan who would be hit hard by the CGT changes then now is the time to get that house on the market, take advantage of the stronger market and avoid a large portion of your profit landing in the taxman's pocket.