Landlord options if CGT goes through the roof - David Alexander comment

As anyone with a vested interest knows, regular net rental income and capital appreciation are the twin pillars of any letting investment.

If higher CGT is on the cards, it is likely to come sooner rather than later, says the property boss. Picture: Lisa Ferguson.
If higher CGT is on the cards, it is likely to come sooner rather than later, says the property boss. Picture: Lisa Ferguson.

Unfortunately, our government wants a share of this capital appreciation and takes the opportunity to grab it in the form of Capital Gains Tax, or CGT for short. This, of course, is common knowledge; so why bring it up now?

The reason, dear reader, is Chancellor Rishi Sunak’s requested review of CGT rules from the Office for Tax Simplification, which has published an online survey and a “call for evidence” to seek views regarding CGT, with the consultation closing on 20 October. One outcome could be new CGT rules being presented at the autumn Budget.

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Since lockdown, Mr Sunak’s furlough scheme has been a godsend for tens of thousands of businesses – my own included. But there is a naivety in some quarters that he has somehow stumbled upon a giant forest full of magic money trees. In reality the cost of the scheme (reckoned to be around £14 billion a month over a seven-month period) will have to be paid for somehow, and it seems highly unlikely that any new CGT rules will not result in a net increase in the tax.

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Will the outcome be a higher rate (at present 28 per cent) or a reduction in the threshold before tax is due, currently £12,300? Either way, property insiders are increasingly fearful that buy-to-let (BTL) landlords will be among those in the firing line.

Westminster (whose responsibility this is) already has form. During the era of George Osborne’s chancellorship, it was open season on landlords as they were hit by serious changes to tax relief on BTL mortgages and on allowances. For some owners this turned a reasonable rental return into a marginal one, leading them to dispose of their assets.

This, of course, was good news for buyers (as it increased the availability of stock) but not for those who rent through choice or because they were unable to qualify for a mortgage.

Dilemma

Higher CGT will present landlords with a new dilemma. By any measure, property has outperformed shares as an investment over several decades. The downside, however, is that you cannot unload “chunks” of a BTL property to negate or minimise exposure to CGT as you can with a shareholding portfolio.

No doubt there are schemes to get round this, but for the ordinary “foot-soldier” landlord they are too complicated and too expensive – and always open to challenge by HMRC. Consequently, should CGT go up then landlords will have to be “creative” (while acting wholly within the spirit as well as the letter of the law, of course).

Fortunately there is a precedent for this. The increasingly draconian cost of Land and Buildings Transaction Tax (LBTT) on transactions over £325,000 meant wealthier buyers, rather than shell out £1 million on a single property in, say, Edinburgh’s New Town, spread the money over three investments in cheaper, but still popular, areas like Bruntsfield.

This meant additional set-up and administrative costs, of course, but these were small compared to the overall saving in LBTT. These landlords, when they sell, will be in a better position to cope with any increase in CGT because the asset can be disposed of in part rather than in whole, thus negating or at least decreasing their exposure to the tax.

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There are options, too, for those with less to spend. For example, rather than pay £300,000 for one flat in Comely Bank, an alternative strategy could be two properties, each at around half that price, in one of Edinburgh’s “blue collar” suburbs or in a provincial town (e.g. Livingston). Eventually liquidating these assets separately could also save on CGT.

If higher CGT is on the cards, then it is likely to come sooner rather than later. Consequently any landlord who was already thinking about selling on next year may want to accelerate this, especially as the recently re-emerged sales market is – much to everyone’s surprise – holding up remarkably well for now.

David Alexander is MD of DJ Alexander

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