Autumn statement changes the game for landlord and overseas investors

Last week’s autumn statement closed a loophole which allows property investors outside the UK to make profits on the sale of homes in this country without having to pay capital gains tax (CGT).

The change will mean that for the first time, overseas investors will be subject to the same tax rules as UK residents. Up until now, a foreign buyer who bought a property for £1 million and later sold it for £3 million could pocket the proceeds tax-free, while someone based in the UK would face a bill of up to £560,000.

In recent years, the UK property market has grown particularly appealing to overseas investors seeking a safe haven for their funds.  On average, up to half of the new developments in central London’s most upmarket boroughs are being sold to foreign landlords.

Another change to the way CGT is charged when a homeowner lets a property which was formally their main residence is also set to boost treasury coffers. It could also catch out accidental landlords and wealthy homeowners wanting to cash in on rising rents and house values whilst minimising their tax liability.

The profits on the sale of a second home are already subject to CGT, but private residence relief reduces the amount paid if a landlord has previously used the property as their main residence.  This reduction is currently applied for the final three years of ownership but this will be reduced to 18 months from April 2014.

The change means that someone selling a property they previously lived in as their main residence and rented out for the past three years now faces a bill.  On a property bought for £100,000, rented for the last three years and then sold for £180,000, this could mean a tax bill of £3,360 after April 2014 compared to nothing now.

The treasury said it expected very few accidental landlords to be caught out by the change as there were other reliefs in place which would minimise their tax bills, including the overall CGT allowance of £11,000.

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