Capital Gains Tax Reduction for Landlords Selling to Tenants

Capital Gains Tax Reduction for Landlords Selling to Tenants

Chancellor Philip Hammond is said to be considering handing a capital gains tax break to landlords who sell their buy-to-let properties to long-term tenants in his budget this month.

The proposals were put forward by “Onward”, (the rather silly-named Conservative think tank). The idea is that landlords could be made exempt from paying some capital gains tax if they sell to tenants.

Onward says the £1.3 billion-a-year cost of implementing the policy could be covered by cutting other buy-to-let investor tax breaks.

Under existing rules, private landlords who sell rental properties are liable for 28 per cent capital gains tax (CGT) on any profit they make. This is actually a special punitively high rate of CGT that was bought in just for landlords by their nemesis, former Chancellor, George Osborne. (For pretty well everyone else, the lower CGT rate of 18% applies).

Capital Gains Tax Punitive Rate

The crazy thing about this special high rate of CGT for landlords was that it was bought in at the same time as Osborne made life a lot harder for private landlords when he clobbered them by removing their ability to deduct all loan costs as taxable expenses (section 24) and imposing a 3% surcharge on stamp duty land tax when they buy property. So, even if landlords were brassed off about being hit with bigger tax bills from section 24 and SDTL – and were considering getting out of the business – they often thought again because the CGT rate had just been jacked up too. So, a big disincentive to selling was in place! And as I pointed out in a recent post, if you don’t ever sell, you don’t pay CGT! And when you die, there is no CGT to pay, just inheritance tax. See link to our post on this:

The Easiest Way for Buy to Let Landlords to Avoid Capital Gains Tax

Onward’s proposed “Good Landlord scheme” would abolish the tax for landlords who sell their property to a tenant, with the windfall split between the two parties.

Should the chancellor announce such a scheme, there are likely to be strict stipulations. To prevent abuse, it is likely landlords will benefit only if they are selling to a long-term tenant, of more than three years. This is to meet the alleged demand for longer term tenancies (though evidence that tenants really want longer tenancies remains as scant as ever).

Onward estimates the average gain per property is £15,000, so first-time buyers could expect to receive £7,500, which could be used to help to fund the purchase. In London, where property price growth is higher, a tenant could receive an average of £19,500.

Capital Gains Tax Reduction for Landlords Selling to Tenants – Would it Work?

But would such a plan work?

We think not.

Firstly, the majority of landlords may not want to sell anyway.

Secondly, how many tenants would want to buy the flat they rent?

Thirdly, how would the scheme be policed to prevent abuse? It sounds like an administrative nightmare.

Capital Gains Tax Reduction for Landlords – A Better Idea

Surely, wouldn’t it be better to just remove the punitive CGT rate faced by landlords? That way, there might be a real increase in the numbers selling.

There are certainly many landlords out there who, (faced with increasing taxes from Section 24 (removal of ability to deduct loan costs in full) and SDLT), would be willing to sell if the CGT rate was the same as everyone else had to pay – 18% for basic rate taxpayers, instead of 28%.

This latest idea from Onward is as flawed as the research that went into their report in the summer – see our previous post: http://www.lettingfocus.com/blogs/2018/07/onward-conservative-think-tank-ideas-on-private-rented-sector-deeply-flawed/

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