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Times
3 days ago
- Business
- Times
The wealth raid gamble that isn't paying off
A Treasury plan to bolster the public purse through higher taxes seems to have backfired. New figures show that the amount of capital gains tax (CGT) paid has plummeted from £14.6 billion in 2022-23 to £12.1 billion the year after. This is despite rule changes that were designed to raise more tax. The number of taxpayers caught in the CGT net did however edge up from 376,000 to 378,000, according to HM Revenue & Customs data. Lizzie Murray from the London tax firm Saffery said: 'The figures present a slight paradox: while increasing numbers have been forced to pay tax, the actual amount paid to the government has dropped significantly compared with previous years. 'So although the rule changes brought more people into the scope of CGT, taxpayers appear to be actively managing their affairs to reduce their tax bills under the new regime.' CGT is a tax paid on the sale of most assets, including second homes. You used to be able to make up to £12,300 of profit tax-free each year, but the allowance was cut to £6,000 in April 2023 and halved again to £3,000 in April 2024 — a reduction by the former Conservative government that is not yet reflected in the latest CGT figures. The new Labour government put CGT rates up in October — basic-rate taxpayers now pay a flat rate of 18 per cent on all profits above the allowance, up from 10 per cent on all assets except property, while higher-rate taxpayers pay 24 per cent, up from 20 per cent on assets except property. These changes will also not be reflected in the latest data. Capital gains are added to your income, so you will be classed as a higher-rate taxpayer for CGT if your taxable gains (your profit minus the CGT allowance) plus your taxable income (your income minus the £12,570 personal allowance) come to more than £37,700 a year. • How much one year of Labour has cost you Shaun Moore from the financial advice firm Quilter said the policy changes had prompted 'behavioural shifts' that had dented the Treasury's tax take. CGT is a fairly easy tax to avoid or postpone. This is because it is often within your control to decide when to sell the asset that will trigger a tax bill. 'If the tax will be higher than they would prefer to pay, many can easily avoid it by just not selling the asset in the first place,' said Joseph Adunse from the accountancy firm Moore Kingston Smith. 'It's something very much in their control, which is different to things like income tax where if the rate increases, you still have the same salary so you just pay more tax.' Adunse said he had many clients looking to mitigate their CGT bill. The idea that policy changes affect taxpayer behaviour is illustrated by the Laffer Curve, an economic theory which suggests that there is an optimal tax rate to maximise Treasury coffers. The general idea is that very high and very low tax rates will lead to reduced receipts. Too low and the tax system will not bring in enough money, but too high and taxpayers will find ways to avoid paying or leave the country altogether. Shifting taxpayer behaviour is more of a risk with CGT than other forms of taxes, according to Chris Etherington from the tax firm RSM UK. He said: 'A large proportion of CGT revenues derive from a small number of taxpayers, so you only have to change a few people's behaviour to lower receipts. In fact, about 2,000 people account for 37 per cent of the capital gains that are subject to tax.' Other factors could have played a part in the drop in CGT receipts. Julian Jessop, formerly of the Institute of Economic Affairs, a free market think tank, said that many had sold assets sooner than they otherwise might have done because they were worried that a Labour government would ramp up wealth taxes. 'There is plenty of anecdotal evidence that Labour's tax policies are pushing the limits of the Laffer Curve,' he said. 'This is also consistent with economic theory and past experience — most countries that adopted wealth taxes have since abandoned them.' The Office for Budget Responsibility now expects CGT receipts to reach £25.5 billion by 2029-30, although this is £5.5 billion less than it had originally forecast in October. A big increase is expected in 2025-26, when those who sold assets in the lead up to October's budget will need to pay their tax bill. Etherington said: 'The government will be hoping to receive this anticipated windfall. The question then is whether this can be sustained, or whether domestic and geopolitical affairs will put the brakes on CGT receipts in the future.' You do not have to pay CGT on the sale of your main home, your car, investments held in an Isa or a pension, Premium Bond gains or lottery winnings, but you should expect a tax bill on the profit you make from selling most other assets. You will also pay CGT when you give something away, trade it for another asset or get compensation based on an item's value, such as if something is stolen or destroyed in an accident. But there are simple ways to set up your finances to lower these bills. Use all your Isa and pension allowances because any gains made from investments held within these 'wrappers' are free from CGT. • Why the super-rich are leaving Britain If you are married or in a civil partnership, look at your tax allowances and tax rates as a combined entity. Adunse said: 'If one of the couple isn't earning income, they would have a lower tax rate, so making investments with a potential CGT liability in their name can mean that you pay a lower rate.' Another option is to offset your gains against your losses. This is called crystallisation and you can do it with losses made up to four years ago. Gifts to charity are also free from CGT, so if you usually give a hefty sum of cash, consider giving the charity the asset that you would have paid CGT on instead. 'Many people may not realise that they are now likely to pay CGT and it's essential to know about the reduced allowances,' said Claire Trott from the financial advice firm St James's Place. 'What may have once been a straightforward sale, could now result in a tax bill.' The Treasury said: 'These figures cover the previous government. The annual exemption ensures people are not taxed on low levels of capital gain, and the current levels remain at an appropriate level to fulfil this while helping to fund essential public services.'
Telegraph
14-03-2025
- Business
- Telegraph
Desperate holiday-let owners foot £12k bills to avoid tax raid
Desperate holiday let owners are incurring five-figure penalties to pay off their mortgages ahead of an upcoming tax raid. Furnished holiday lets benefit from generous tax breaks that regular lettings do not. However, from April 6, this special tax treatment will be abolished under plans announced by the previous government. With less than a month to go until the regime ends, property owners are racing to make the most of the tax breaks while they can – and deciding what to do with their investment after the cut-off to avoid falling into a hefty tax trap. To qualify as a 'furnished holiday let' (FHL) for tax purposes, a property must be available for hire for 210 days and let for 105 days or more within each tax year. Lettings to families and friends at zero or reduced rates are not counted. It must also be fully furnished and not let out to the same person for more than 31 consecutive days or more than 155 days per year. FHLs are currently treated as trading businesses, meaning owners can take advantage of various capital gains tax reliefs when selling or giving away the property. They can also deduct mortgage interest payments from rental income at their marginal rate to reduce profits and, therefore, their tax bill. But from April, sellers of FHLs will need to pay capital gains tax, interest relief will be restricted to a flat rate of 20pc (in line with other let properties), and profits will no longer count when calculating relief on pension contributions. Zena Hanks, partner at chartered accountancy firm Saffery, said some of her clients who own FHLs are considering repaying their mortgages early, even though this can mean incurring an early repayment charge – usually between 1pc and 5pc of the outstanding debt. One client, an additional-rate taxpayer, decided to pay £8,000 in early mortgage repayment charges on their furnished holiday let properties in Devon. The client had worked out that the loss of mortgage interest relief from April would cost them considerably more in the long run. Analysis by Saffery shows that a FHL owner in the higher-rate tax bracket with a £400,000 mortgage at 5pc interest could expect to be hit with early repayment charges of around £12,000 to settle the debt. However, the reduction of mortgage interest relief from 40pc to 20pc would slash their savings by £4,000 per year, meaning paying off the mortgage would make sense in the longer term – even ignoring the cost of the mortgage itself. Ms Hanks said: 'These charges can very easily run into five figures, even for standard-sized mortgages. Despite this, early repayment may well still be the cost-effective option for FHL owners when compared to the lost income tax relief in just the first year of the changes, were they to stick with their monthly repayments. 'For anyone considering repaying their mortgages early, the first question is of course where they will be sourcing the capital required to do so. We are seeing FHL owners taking various approaches – some are selling one or more of their properties. 'However, another change to the capital gains tax rules means that FHL disposals can no longer qualify for 'business asset disposal relief' from April this year, so any gain on a property sale that exchanges on or after April 6 will be taxed at the 24pc rate. 'In the run up to April 5, any such gain may attract a more favourable rate of 10pc, which is why we are seeing an increase in FHL properties being sold.' If you were already planning to dispose of your holiday let, you may well benefit from doing so before the changes come into force. Sean McCann, chartered financial planner at NFU Mutual, said: 'If you are selling and buying a new furnished holiday let or other qualifying trading asset, you can 'roll over' all or part of the gain, which allows you to defer all or part of the capital gains tax payable. 'Or if you are gifting the property, you and the person you are giving it to can claim 'gift hold over relief'. This means there is no capital gains tax at the time of the gift, and any capital gains tax is 'held over' until the new owner disposes of it. 'If you're planning on ceasing your furnished holiday let business, if you do so before April 6, you may be able to claim business asset disposal relief – which allows you to have £1m of gains during your lifetime taxed at 10pc.' The impact FHL income can have on tax-free pension contributions is another benefit that is 'often overlooked', he added. In the 2024-25 tax year, all taxpayers are entitled to pay up to £60,000 or 100pc of their income (whichever is lower) into their pension tax-free. FHL profits still count as income until April 5, giving FHL owners a window to make higher tax-free contributions. One of Mr McCann's clients is putting 'as much as possible' into his pension before the rules change next month. 'Profits from furnished holiday lets are currently treated as earned income and can be used to make pension contributions. This means that for every £80 paid in, HMRC will add another £20. 'If you pay 40pc income tax, you can claim up to an additional £20 via your tax return. If you haven't been taking advantage of this benefit, you can go back up to three years and pay a larger sum to take maximum advantage before this benefit closes on 6 April.' If you are considering renovating your holiday let, doing so in the next month would allow you to take advantage of the current tax treatment. Mr McCann added: 'Currently, if you spend money on improvements such as putting in a new kitchen, bathroom or central heating, you can claim 100pc tax relief, within limits. 'From April, you will get tax relief on repairs to the property, replacing furniture or washing machines, but not for capital improvements. So, if you are planning to put in a new kitchen or extend the property, it may make sense to do this before April 6.'
