How much extra rent do you need to offset Labour’s proposed CGT grab?

How much extra rent do you need to offset Labour’s proposed CGT grab?

0:02 AM, 1st October 2024, About An hour ago

Text Size

Hello, Many landlords in the past used to budget for a capital growth strategy with their investments guided by a 5% annual gross yield on rental income and 5% average annual return on capital growth.

The rental yield just covered the running costs of maintenance, management and finance though recently higher rents were necessary to cover the current high finance costs. 5% capital growth seemed reasonable based on a doubling of house prices every 14-15 years.

So, if Labour increases the capital gain tax top rate from our budgeted 28% (24% current) up to 40%, then how much would landlords need to increase the rent just to keep their budget goals?

Here are some calculations:
For simple terms I’ll use a £250,000 property.
Capital growth 5% growth per year £12,500 in one year
Historic 28% CGT rate £3,500 / proposed 40% tax due £5,000- extra tax to pay £1,500 (£125pm)
This year’s 24% CGT rate £3,000 / proposed 40% tax £5,000 – extra tax to pay £2,000 (£166.66pm)

Rental Yield
5% yield means rent of £12,500 (£1,041.66 per month)
To offset the extra tax due on capital gain to keep to the budget (based on old CGT rate 28%) we need £125pm + income tax due on this extra profit income.
Therefore a 20% taxpayer would need to increase monthly rent by £156.25 from £1,041.44 to £1,198
And a 40% taxpayer would need to increase monthly rent by £208.34 from £1,041.44 to £1,250.

Therefore, just to keep the current projected income stream as planned, then the landlord would need to increase rents by:-

15% more rent for a 20% landlord taxpayer or 20% more rent for a 40% landlord taxpayer.

NB If you budgeted for this current year’s 24% CGT rate, then 20% landlord taxpayers need an extra 20% rent income, and 40% landlord taxpayers need an extra 26.6% extra rent to offset the extra CGT.

This, of course, does not take into account all the past historic years of capital gain that will be overtaxed (stolen) off us for keeping a low rent/capital growth strategy.

The calculations are meant as a guide, but I’ll be interested for people to check my maths, and whether they will have the courage to increase the rents so aggressively just to retain their projected income goals.

Thanks,

David


Share This Article


Leave Comments

In order to post comments you will need to Sign In or Sign Up for a FREE Membership

or

Don't have an account? Sign Up

Landlord Tax Planning Book Now