Rumours of hikes in capital gains tax (CGT) have landlords running for the exit.
These threatened tax changes, coming on top of the new measures in Labour’s Renters Rights Bill, have the potential to make landlords and tenants’ lives difficult.
Given Labour’s denials of changes to mainstream taxes, capital gains tax (CGT) and inheritance tax changes (IHT) would be obvious targets to be in Rachel Reeves’ cross hairs.
Currently, for the 2024/25 tax year, CGT is charged at the rate of either 10% or 18% for basic rate taxpayers and either 20% or 24% for higher or additional rate taxpayers.
For basic rate taxpayers a 10% CGT rate applies on most business assets and 18% on residential property, whereas higher income individuals are subject to a 20% CGT rate on most of their business assets and 24% for residential property, as set out in the Finance Act 2024.
The dilemma faced by buy to let landlords in England, those with substantial gains, plus the biggest changes to rental laws since the assured shorthold tenancy (AST) became law in 1988, is, do I stick or twist?
Does it make sense to sell-up before the budget, due next month, to take a CGT charge at the current rates before any hike in these rates – rumoured to be moved in-line with income tax rates, so 40% for high-rate taxpayers?
For Individuals the CGT tax-free annual allowance now only gives a £3,000 gain before the tax applies. That compares with £6,000 the previous year and £12,300 the year before that (£23,600 if owned jointly as a couple).
You wouldn’t normally have to pay any capital gains tax when selling your main home.
According to a recent report published in the Daily Telegraph, landlords face an average £90,000 capital gains tax hit if, after the first Labour Budget, CGT rates rise in line with expectations.
It means that capital gains made on paper, through house prices rises over recent years, and accumulated by the average buy to let landlord, would be lost to the Treasury.
According to figures gleaned from property agents Hamptons and the Land Registry research, an increase along these lines would represent a 67% tax increase over current rates for anyone selling a buy to let after 20 years of ownership.
As quoted by the Daily Telegraph, a Treasury spokesman had said Ms Reeves
“has been clear that difficult decisions lie ahead on spending, welfare and tax” to address the “£22bn black hole” in public finances.
The Chancellor has already committed to scrapping the winter fuel payments for around 10 million pensioners and has ditched the planned Conservative’s social care reforms to save £5.5bn.
The sentiments expressed by Ms Reeves already don’t bode well for any leniency when it comes to taxes on the wealthy. There are also concerns as to what she has planned for inheritance tax (IHT), currently set at £325,000.
There's normally no Inheritance Tax to pay if the value of an individual’s estate is below that £325,000 threshold or one leaves everything above the £325,000 threshold to a spouse, a civil partner, a charity or a community amateur sports club. Otherwise, anything above that is taxed at 40%.
However, for anyone leaving their home to their 'direct descendants' this basic allowance can be extended by £175,000. This applies to children (whether biological, adopted, foster or step) or grandchildren, but not, for example, nieces and nephews.
It means for some people there are two tax-free allowances: £325,000, basic inheritance tax allowance plus the £175,000 'residence nil-rate band', commonly known as the 'main residence' band. It brings the allowance up to £500,000 of an individual’s estate or £1million for a couple.
What few consider when contemplating capital gains on property is the effects of inflation. Inflation is no longer considered by HMRC over the length of time an asset is owned when calculating CGT liability. So, as David Fell, lead analyst at Hamptons, told the Telegraph, “Given inflation has risen by 80pc over the past 20 years, some property sellers will end up being taxed on a real terms loss.”
Fell gives the example of a property purchased in 2007 with an average gain of just over £100,000 giving an increase of 57%, but during that period the Consumer Prices Index has rocketed, rinsing faster than house prices at a rate of 67%.
Mr Fell told the Daily Telegraph:
“While on the face of it aligning capital gains tax rates with income tax rates sounds fair, the biggest issue is probably inflation – given that gains from 10 to 20 years ago are being taxed at a single point in cash terms.
“On the flip side, it will probably prove to be a disincentive for new landlords weighing up the price of investing compared to other options. This will squeeze supply even further and widen the gap between personal and corporate tax rates,” he added.
According to figures produced by Hampsons, buy-to-let landlords have been selling as higher mortgage rates, tightening regulation and the threat of unfavourable tax changes have encouraged more landlords to sell up.
According to the property agents, there have been around 1.5 million property sales made by landlords since the start of 2016. That’s compared to about 1.2 million purchases during the same period. And according to the consultancy firm TwentyCi, the number of properties available to rent across the UK is down by a quarter since 2019.
What’s more, these figures came ahead of yet another round of tenant friendly legislation curtesy of the Renters’ Rights Bill and another potential tax hike in the October Budget. The rush to the exit by long-term buy- to let investors adds up to a net loss of more than 300,000 rental homes over the past eight years.
Institutional investors don’t fill the void
The void being left is to some extent being filled by large companies (institutional investors) using the build to rent scheme - pension funds and insurance companies partnering with house builders and developers. They are building large-scale rental home developments which are to be professionally managed.
However, according to Savills, the property agents, there have only been just over 100,000 build to rent homes completed since June 2016, nowhere near enough to fill the gap left behind by small-scale landlords who number around 2.8 million, most of whom are aged over 55.
Agents who are members of the Royal Institution of Chartered Surveyors have also reported an increase in landlords selling up because of the anticipated coming changes. These have also had an impact on the number of new rental homes coming onto the market.
Other RICS members are pointing out the threat from the Labour Government's plans for its Renters Rights Bill, ending Section 21 'no-fault' evictions - already planned in the Conservative’s Renters (Reform) Bill - but now with other tenant security measures that go much further.
Energy efficiency standards rising
The Labour Government is also planning to accelerate the introduction of a new minimum EPC requirement that buy to let landlords must meet. Currently, landlords’ properties must reach a minimum EPC rating of “E” to be let. Under Labour, this rating is expected to be upgraded to a “C” rating by 2030.
It means around 2.7 million rental properties across the UK will need improvements with some type of energy efficiency measure to meet the new EPC ratings 2030.
Based on historic data on retrofitting costs provided by English Housing Survey, and adjusted for inflation, it is estimated that landlords will face a collective bill of around £24 billion, or £10,000 per UK buy to let landlord.
The upshot of all of this is a reduced supply of rentals in some key locations and as supply goes down market rents increase. According to research commissioned by the National Residential Landlords Association (NRLA), while landlords have been selling, demand for renting has been increasing.
According to one report in the Negotiator Journal, those tenants looking to move are finding it increasingly difficult to secure a new tenancy based on data from The Deposit Protection Service (The DPS). “The number finding it ‘difficult’ or ‘very difficult’ to relocate has jumped almost 10% in the last year and now impacts half of all tenants.”
The result is that existing tenants are staying put longer, and new (potential) tenants are finding it increasingly difficult to find suitable accommodation.
Matt Trevett, Managing Director at The DPS, has said:
“Finding a new rental property is getting tougher for a growing number of tenants, especially for younger, non-student renters and those who are not in employment, due to a combination of fewer rental properties on the market, the current cost of living, as well as increased mortgage costs for landlords.”
Tags:
Comments