With Chancellor of the Exchequer Rachel Reeves refusing to rule out a swinging increase in capital gains tax (CGT) for landlords, trying to beat the imposition of this tax is something some landlords are gambling on.
“Show me the incentive and I’ll show you the result”, Charlie Munger famously quoted, and the new Labour government certainly seems to be giving landlords lots of incentive: a gigantic incentive to leave the private rented sector (PRS) for good.
There are other measures the new Labour Government is said to be plotting that will give landlords plenty of sleepless nights too: these are a ban on evicting tenants if they are placed in hardship – the hardship test – and a ban on evictions for 2-years following a new tenancy, where a landlord is seeking to sell or re-occupy the property. On the other hand, tenants, it is thought, will be allowed to give just 2-months’ notice to leave from day one.
A capital gains tax hike of the kind envisaged could add thousands to a landlord’s bills if they sell the property once the new regulations come into force, usually on 6 April following the Autumn Budget and the passing of the Finance Bill.
The UK government can implement certain tax changes immediately from the date of the budget announcement which is not too far off – 30 October. This practice, known as "Provisional Collection of Taxes," allows the Chancellor of the Exchequer to announce tax changes that take effect right away, even before the Finance Bill is enacted (which enacts the budget's measures into law) is passed by Parliament.
If this happened landlords would have little or no time to sell before being caught in the CGT trap.
However, it is generally not likely that changes to Capital Gains Tax (CGT) would be implemented immediately under the Provisional Collection of Taxes Act 1968. The Act is primarily used to implement changes to indirect taxes, such as duties on alcohol, tobacco, and fuel, which are considered to have a more immediate economic impact.
The nature of CGT is that it is a direct tax on the profit realised from the sale of certain types of assets, property being one of them. But unlike duties on goods, CGT does not have an immediate, day-to-day impact on consumer behaviour or market prices, so there is less urgency to implement changes immediately.
CGT changes also involve complex rules and require taxpayers to adjust their financial planning, so fairness and administration are factors, immediate implementation would create real administrative challenges for both taxpayers and HMRC.
CGT changes usually undergo more scrutiny during the parliamentary process, as they can have significant impacts on investment behaviour and economic planning, so this scrutiny makes immediate implementation less likely.
Historically, changes to CGT have typically been announced to take effect from the start of the next tax year (6 April), rather than immediately. This would allow taxpayers and financial advisors time to adjust their plans accordingly and in the case of landlords, time to sell-up before the measures are implemented.
However, there are a couple of scenarios that spell danger: the government could announce changes to CGT during the budget with a specified future date for implementation, or it could trigger anti-forestalling measures.
If the government is concerned about people rushing to make disposals before new CGT rates take effect, they might consider introducing anti-forestalling measures to mitigate this. This is something they have said they will do with the VAT on school fees change, where parents opt to pay in advance to avoid the tax.
According to The Daily Telegraph there is solid evidence that new landlords’ letting instructions to estate agents across the country fell by 16% earlier this year, but in some regions the fall-off was much higher. In East Anglia they had recorded a drop of nearly 60%, and the East Midlands nearly 40%. These figures were over double those recorded 12 months ago.
RICS (The Royal Institution of Chartered Surveyors), following its own latest market survey, has said that with “yet more legislation” - regulations that will make the operation of a lettings business both more complex and expensive, with the prospect of an increasingly “unfair” tax regime to come - there is a diminished appeal to being a buy-to-let investor landlord.
Chancellor Reeves, although several times reiterating Labour’s manifesto pledge not to raise VAT, National Insurance or income tax during the current Parliament, has repeatedly failed to rule out aligning capital gains with the income tax bands. But just this week on her visit to the United States she refused to deny the move, which could leave the average landlord £11,000 worse off, according to expert tax analysis.
RICS said Labour’s “bias” towards tenants has played its part in many investors’ decisions to sell up.
According to the international estate agents Hamptons, the number of properties now available to rent in Britain is down by nearly 50% since the April 2019 level.
John Haigh, a Knaresborough-based surveyor, told The Daily Telegraph that this trend will lead to a realignment of house prices.
“More properties are coming to market alongside new builds. Inevitably, this is leading to a downward trend on sale price,” he has said.
Announcing the new Renters’ Rights Bill the new housing minister, Matthew Pennycook, says he will replace the previous government’s Renters (Reform) Bill with one (the Renters Rights Bill) that looks on the face of it to give tenants even more powerful rights that the Conservative ever envisaged.
Labour also plans to implement the Section 21 ban immediately, rather than waiting until the courts can be reformed and their existing large backlog of cases cleared, as was the Conservative’s plan.
“Without no-fault evictions, landlords will be at the mercy of the courts plagued by delays to evict a problem tenant,” says The Daily Telegraph, on top of that “Matthew Pennycook is also keen to include a “hardship test” in the bill, which would let judges stop evictions in cases where renters were found to be worse off,” says the newspaper
John Chappell, an East Midlands surveyor, told the newspaper that more landlords are selling up “especially since seeing rumours of the Government’s plans for further strengthening of tenants’ rights. No self-respecting professional supports poor housing or [bad] landlords, but this has the potential to cause a supply shortage crisis,” he said.
A spokesman for the Ministry of Housing, Communities & Local Government told the newspaper:
“We do not accept these claims. Good landlords play a vital and valuable role in providing homes for millions of people across the country and have nothing to fear from our overdue, sensible overhaul of the private rented sector. The Bill protects renters from the small number of bad landlords who exploit tenants and empowers them to challenge unreasonable rent increases and conditions.”
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