Why expats should still focus on capital gains

Long time readers should know, here at British Expat Money we like capital gains. There are many reasons for this, but one of the main ones was the tax free allowance.

There are lots of these little fellas in the UK tax system. They can save you a lot of money if you are eligible ie have a British passport. And one of the bigger ones used to be the one for capital gains but……

How times have changed since way back when (all of two years ago).

It feels like just yesterday you could earn a commendable £12.3K through capital gains without any need to pay tax…………

But that’s nothing but a distant memory now. In April 2023 UK Chancellor, Jeremy Hunt decided to give you a hair cut. Shortly afterwards you it became a fun-sized £6K.

But that’s where the fun stops.

Our friend Mr Hunt has promised to take you to the salon again next month (April 2024) for a full head shave.

Meaning for the foreseeable future our once impressive £12.3K has reduced to a microscopic £3K.

You don’t have to be a mathematician to understand that’s not good.

I mean, based on an average house price of circa £300K and average house price growth of getting on for 4% per annum you are looking at triggering a capital gain after just three months of ownership.

(A 4% price increase on a £300K property over one year equates to £12K so that’s £1K a month).

No wonder the Government thinks this will impact an extra 260K taxpayers.

Expat tax free allowance

Just to be clear. There are lots of tax free allowances out there. They haven’t all been reduced. We are talking about the one for capital gains here.

Whilst expats that stay outside the UK for more than five years don’t usually pay capital gains when they sell other assets, property and land is a different matter.

Unless the property is your permanent home where you live you pay.

The very fact you are an expat suggests it’s unlikely to fit that description.

There’s an allowance (that was £12.3K and now is £3K) but above that you pay the following.

• Property – 18% for basic rate tax payers and 28% for higher rate tax payers (reduced to 24% from April 2025).
• Other assets – 10% for basic rate taxpayers and 20% for higher rate taxpayers.

In other words, most expats will need to pay CGT when they sell property that has increased in value by more than £3K which as we’ve already established is going to cover pretty much every property out there.

OK some people will be luckily enough to be so unlucky they’ve lost money on a property but that’s going to be the minority.

Expats are just like landlords in the eyes of HMRC.

In fact, many of them are Landlords, which is handy because large UK estate agent chain, Hamptons have researched what this all means for our pockets.

How much capital gains tax will I have to pay?

According to them, the typical capital gainst tax (CGT) bill for Landlord’s will increase by £2,610 (12%). Ouch!

And based on their figures, they predict an average CGT bill of £24K. Double ouch!

It may come as no surprise then, research by Simply Business has found a quarter of all landlords are planning to sell up asap.

And that a third of those said it was for tax reasons!

Don’t turn your back on capital gains just yet though

On the one hand, a quarter of all landlords seems like a big amount, but on the other, what about all those other landlords out there that are holding on to properties. There are three times as many of those.

There are hundreds of reasons for not selling property, but I’d hazard a guess there’s more than a few that are still using capital gains to grow their wealth in spite of the tax squeeze.

You see, whilst slashing the allowance has made a difference, it’s not a showstopper for two key reasons.

• Income tax is still higher than capital gains
• Capital can gain without triggering a tax event

And its worth looking at those two in a little bit more detail.

Income tax vs capital gains

The fact of the matter is this. All things being equal income tax is greater than capital gains tax.

Check out the table below if you don’t believe me.

Rate	Income Tax	Capital Gains (Property & Land)	Other assets (ie shares)
Basic	20%	18%	10%
Higher	40%	28% (24% from April 2025)	20%

Capital can gain without triggering a tax event

CGT is only payable on a realised gain and here’s the key: You don’t have to realise said gain to enjoy it.

It’s worth taking a moment to digest that.

Here’s a quick example that should help to explain this concept.

Imagine you buy a £100K house with a £25k mortgage and £75K borrowed from the bank.

You’ve got a mortgage for 75% of the house value.

Imagine said house then doubles in value some time in the future. It’s now worth £200K.

Providing your financial standing remains as was, you should be able to borrow 75% of the house value again.

• 75% of £200K is £150K.
• You’ve just got your hands on a large chunk of change without paying any capital gains tax.

No wonder remortgages are popular with the property investment crowd.

The bottom line

• The expat tax free allowance has been slashed
• This means just about expat will have to pay capital gains on property sales
• But you can still take advantage of capital gains without paying tax by lending against them
• And capital gains tax is still lower than income tax (all things being equal).