Capital Gains Tax and Buy to Let We Predict no Rush to the Exits by Landlords
I see the government is looking to increase the rate of capital gains tax to 40% and possibly cut the amount of gains one can have before it becomes payable (currently just over £10,000) to say £2,000.
This is something the Conservatives may be forced into by their Liberal Democrat partners, because as Nick Clegg says, it seems crazy that a millionaire can be paying less tax on his capital gains than his cleaner has to pay on the income he / she gets from cleaning the same millionaire’s mansion.
This kind of makes sense to the old socialist in me (not that most buy to let landlords or businessmen are millionaires but, hey, let the thought hang there for a while.)
Tesco Workers Hit Oh Really?
Of course, the centre and right wing Sunday newspapers were full of much wailing on behalf of the middle classes – one even highlighting how ordinary poor checkout workers at Tesco who invested in their company’s shares on SAYE schemes at that employer could be hit. (Oh really, and how many workers at Tesco do they think can afford to squirrel away more than a few quid a month making them liable for CGT on over £2,000 of gains? Come on, figures for that please!)
Anyway, right on cue, I get a few calls from journalists.
Death of Buy to Let?
“So is this the death of buy to let?” they ask.
Won’t thousands of landlords all be now rushing out to sell their properties before the change in CGT hits?”
My answer is “No” to the first question and “Unlikely” to the second.
But before I go into all the reasons why, let’s have a look at the past predictions for the demise of buy to let and how previous tax changes have affected the sector (or not).
A few years ago there was a big change in how capital gains tax was levied on buy to let (as well as other so called, “non business assets”)
Out went the old taper relief system (where the longer you held the asset the less tax you had to pay) and in came a new system where a flat rate of 18% would be levied.
At that time, lots of journalists predicted there would be a big rush from owners and landlords to sell second homes and buy to lets to take advantage of the new lower rates.
I said it would not happen then – and it didn’t.
And there is a good reason why it didn’t happen then and it wont now either.
Income Rich Landlords
You see, landlords, whether professional ones or the type with just one buy to let, buy their properties for a mix of objectives – it might be for capital gain and it might be for income. It depends on the individual and most probably don’t worry too much about it or give it much thought.
All they want is something that they have more control over than they would get with a conventional pension where they would have to buy an annuity or sink it in a dumb endowment with a life company (with all the lack of transparency and high costs that entails.)
(By the way I am pursuing a really fun legal action against a life company in connection with an endowment under Unfair Contract Terms law, but that’s a story for another day.)
One journalist insisted, “But most landlords buy for capital gains don’t they?”
I said that whilst many may well have done so originally, those that bought in the period from 1998 to mid 2007 (before the banks got all mean with mortgage rates following their own hideous creation of the credit crunch) would now be quite income rich because an awful lot of them will be paying mortgage rates somewhere between 0.7% above and 1.75% above Bank of England Base Rate.
With base rate at 0.5% now, this means that many will be seeing quite a juicy income right now from their buy to let investments.
So whilst it is true, they may well have bought for capital gains, the income flow from their buy to let assets will keep many from selling, unless they really need to sell in the short term for some special reason.
And so that is why I am sure most old hand landlords are getting will keep them from selling in any number.
Landlords Will Not Sell Up In Number
They know that they may as well hang on and keep the incomes that their pre 2007 buy to lets are giving them. After all, they can always sell later when Vince Cable has shuffled off the scene and George Osborne (or a Labour successor) has cut capital gains taxes once again. (And with Vince and George hardly bosom mates, that may not be too far away.)
Landlords also know (as I know) that there are actually many exemptions in relation to CGT, like Letting Relief. Ok, exemptions like these may be in the firing line too (thanks to our dumb “flipping” MPS) but landlords know that given that they house over a million people on housing allowance for the state, the government would not dare risk alienating them too much.
All the same, the more experienced landlords will hope that some of their fellow landlords will actually panic and sell up – leaving them with less competition and therefore free to increase rents for all those people who can’t afford to buy and the even bigger army of those who simply just don’t want to settle down and buy a home of their own.
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