How landlords who sell their homes can get their capital gains tax back in one go AND increase their pension

With the fall budget approaching, some have decided to sell their homes to avoid higher costs now and potential capital gains tax evasion in the future.

The fear among homeowners is that Chancellor of the Exchequer Rachel Reeves will massively increase CGT in the Budget as part of her bid to plug her perceived “£22bn black hole” in the UK’s finances.

Currently, landlords who pay a higher tax rate pay 24 percent on the profit they make on their property. However, this could increase to 40 percent if the Minister of Finance decides to align capital gains tax with the income tax rate.

Regardless of a potential CGT raid, more buy-to-let landlords are already selling their property. However, many will be wondering how they can save or invest the proceeds after the sale of their property has been completed.

Putting money into a pension fund can be a lucrative move as it allows you to recoup capital gains tax and increase your pension pot.

Adding the money to their pension would fit in with the investment strategy of many landlords, who use property investments as a retirement nest egg.

There are also rumors of changes to the tax deduction on pension contributions for the October 30 budget. A landlord who wants to sell his home soon can therefore avoid both increases if he agrees in time.

The pension tax relief means they can reclaim the capital gains tax due on up to the annual allowance of £60,000 this year, and potentially more if they can carry forward previous years.

Steven Cameron, pensions director at Aegon, said: ‘There has been much speculation that the autumn budget could see increases in capital gains tax rates and that there could be changes to pension tax, such as the loss of higher or additional tax breaks on personal contributions.

‘The threat of higher CGT penalty rates would lead many landlords to consider selling their rental properties.

‘This changes the long-running debate between investing in real estate and investing in a pension. This is particularly relevant for people who see a second home as a retirement provision.’

‘Anyone considering selling a rental property may consider investing the proceeds in a pension or in shares and bonds from the Isa.’

Landlords are aware of the speculation about capital gains tax, but it is the pressure elsewhere that is causing many to sell their homes.

Higher mortgage rates, less favorable mortgage interest deductions, stricter regulations, higher costs for energy-efficient measures and other higher bills mean that more people are cashing in their profits and moving on with their lives.

However, there are other reasons why landlords want to sell, such as higher mortgage rates and the Renters’ Rights Bill, which makes it harder to evict tenants without good reason.

Should you reinvest your money in a pension?

As a homeowner, it is unlikely that you will be able to put your home on the market now and sell it before the October 30 budget.

But those who are already in the process may be able to make some money before that date.

Capital gains tax is charged on annual profits on assets of more than £3,000. Currently, landlords in the process of selling will be charged 24 per cent CGT if they pay a higher rate or an additional rate.

Basic rate taxpayers pay 18 percent capital gains tax, but the gain is added to their other income to determine the rate. This means they could end up in the higher rate bracket.

Landlords may wish to consider paying the proceeds of their sale into a self-invested personal pension, also known as a Sipp, to reclaim their CGT loss on sale and give their pension a one-off boost.

Pension contributions for most people automatically qualify for basic rate tax relief from the government. To get savers back to the position they were in before the 20 per cent tax, contributions will get a 25 per cent boost – turning, for example, £80 paid back into £100 before tax.

Higher rate and additional rate taxpayers can claim the remainder of their tax relief through self-assessment, receiving 40 percent and 45 percent tax relief on their contributions.

There is an annual pension allowance which limits contributions, including basic rate tax relief, to £60,000 per year, so it may be a number of years before you can contribute the funds from the sale of the property.

However, savers can carry forward unused allowances from up to three years earlier, provided they were part of a registered pension scheme during those years. This would include an occupational pension scheme.

Cameron explains: ‘The annual pension payment is currently £60,000, with the option to carry forward any unused benefits from the past three years.

‘In some cases, making a personal pension contribution may result in some or all of the capital gains from the sale of the let property being taxed at the basic rate of CGT, 18 percent, rather than the higher rate of 24 percent.

‘If you are building up a pension, you do not have access to your money. You are currently only 55, but in 2028 that will be 57. However, you may be eligible for tax relief at your highest marginal income tax rate at this time.’

According to data from the Institute for Fiscal Studies, for 30 to 40 percent of private sector employees, representing 5 to 7 million people, it is inevitable that their company pension will no longer meet the requirements for a minimum standard of living.

Moving your money into a pension fund also gives you access to a tax-efficient package that allows your investments to grow without paying additional capital gains, dividend and income taxes.

Landlords who are making large profits and are considering building up a pension would be wise to contact a specialist tax or financial advisor who can explain the options and ensure that everything is done correctly.

What if capital gains tax is increased in the budget?

It looks very likely that capital gains tax rates will be increased in the budget.

It has been suggested that Rachel Reeves could equate CGT to income tax, changing the top rate to 40 per cent and the top rate to 45 per cent. Basic rate taxpayers could see a smaller increase to 20 per cent.

If there are any changes to the budget, they may not be as drastic as landlords fear, and they may not take effect immediately.

Economists warn against raising capital gains tax rates to the same level as income tax rates without indexing. Only gains above inflation would be taxed.

If capital gains tax were increased to the level of income tax and pension relief remained the same, landlords could potentially recoup their capital gains tax by paying the profit into a pension fund.

Landlords should also consider using their Isa exemption to take advantage of another tax scheme.

With an annual Isa limit of £20,000 and a £60,000 deposit into a pension fund, they could put up to £80,000 of proceeds into tax-efficient accounts without having to transfer any pension benefits.

Cameron said that unlike pensions, ISAs “offer tax-efficient savings arrangements without your money being tied up.”

How many landlords sell their homes?

Figures from Rightmove show that 18 per cent of homes currently for sale were previously available to rent, compared to just eight per cent in 2010.

In London, this figure rises to almost a third of homes previously available to rent. In the North East and Scotland, 19 per cent were previously rented.

Hamptons data shows the number of homes being bought by landlords has fallen to a 14-year low.