Budget Ignites Fears of Tax Hikes Among Landlords

As the Autumn Budget presentation day of 30 October nears, rumours of potential hikes to Capital Gains Tax (CGT), Inheritance Tax (IHT) and Stamp Duty Land Tax (SDLT) have left the property sector on high alert. Landlords are especially worried about the impact the budget and any new provisions could have on them.

The stakes are higher still for those with Furnished Holiday Lets. With their favourable tax treatment set to disappear at the end of the tax year, further tax changes may seem like yet another blow.

Will the Government Hike Taxes or Eliminate Reliefs?

Currently, taxpayers face an 18% CGT on residential property gains, while higher and additional rate taxpayers are hit with 24%. By contrast, most gains from other assets are taxed at 10% or 20%.

Although some have suggested an increase in CGT rates, Prime Minister Keir Starmer has dismissed the notion of aligning the top CGT rates with those of the highest dividend Income Tax rates as “wide of the mark.”

That assurance may bring relief to landlords contemplating a sale, but any hike in CGT—even a small one—could still add to their burden. And for those whose property value has jumped more than their original purchase price because of refinancing, even a small tax increase could be a big burden.

In addition, the government may also be weighing adjustments to various reliefs. One is incorporation relief, which allows eligible landlords to transfer properties into a limited company without facing immediate CGT liabilities, as long as certain conditions are met.

Its removal could hit landlords looking to incorporate as a means of managing their property portfolios more tax-efficiently. Given the severe restrictions on mortgage interest relief for unincorporated letting businesses, incorporation has become an increasingly popular strategy.

If the relief were to vanish, landlords would suddenly see immediate tax liabilities when transferring properties, likely discouraging incorporation and ultimately leading to higher operational costs.

Could Changes to IHT Rates Mean Higher Taxes?

IHT currently levies a hefty 40% on the value of estates surpassing the available nil-rate bands. However, rumours abound the government may consider introducing varying IHT rates or lowering the threshold at which IHT kicks in. Those changes could lead to more estates, including rental properties, facing higher taxes. This may force beneficiaries to sell properties to pay the tax.

Another area ripe for reform is the seven-year gift rule, which presently allows most gifts made more than seven years before death to escape IHT. If the timeframe were to be extended, more recent gifts could suddenly fall under the IHT umbrella, raising the tax burdens for landlords who have transferred properties to family members in the past few years.

Moreover, gifting a residential property is typically considered a disposal for CGT purposes, triggering a CGT liability. An extended period of IHT chargeability could mean landlords face the daunting prospect of incurring both CGT and IHT on gifted rental properties.

What Are the Implications of the 3% SDLT Surcharge?

In England and Northern Ireland, purchasing rental properties typically incurs an additional 3% SDLT surcharge. However, any changes to the standard SDLT rates or thresholds could affect landlords' buying and selling decisions.

The Labour government’s fiscal plan includes a proposed 1% increase to the non-resident SDLT surcharge on residential property purchases, pushing the highest rate for non-UK residents to a high of 18%.

The move appears aimed at discouraging overseas buyers from investing in UK property, which could succeed if the tax burden continues to rise for foreign investors.

Meanwhile, the nil-rate band for SDLT, introduced by the previous government, is set to end on 31 March 2025, after which it will drop to £125,000. This could dampen landlords' enthusiasm for further residential investments, adding an extra tax cost of up to £2,500 on new purchases.

Similar property stamp taxes exist in Scotland and Wales, where the respective governments establish their own rates. Although those should remain unaffected by the upcoming Budget, any increases in England often influence devolved taxes over time, as regional governments tend to follow suit.

How Will New Energy Regulations Benefit Landlords?

The government has also made important commitments regarding rental properties that could affect landlords' cash flow and compliance.

It is said that new regulations are set to require landlords to upgrade their properties ― like better insulation, energy-efficient windows and modern heating systems ― to achieve higher Energy Performance Certificate (EPC) ratings. Although this may come with hefty upfront costs, they can lead to long-term savings on energy bills and perhaps attract higher rental incomes.

Conclusion

The upcoming Budget changes are primed to reshape the landscape for landlords. But the full implications will become clear in just a few days.