We must give tax incentives to landlord ‘veterans’ - David Alexander

This lockdown has had few compensations but among them are bluer skies, cleaner air and the ease with which one can find a city-centre parking space (while conducting “essential business,” of course!).

The situation facing one of my clients shows how landlords are being squeezed, says Alexander. Picture: Lisa Ferguson.

Another is a drop in anti-landlord propaganda by the usual suspects, helped by the fact that many landlords have capped or delayed rental payments to help tenants struggling with the job implications of Covid-19.

However, no matter how much sympathy there is for tenants, the time will come when hard decisions have to be made. Landlords cannot continue on the basis of limited rental income indefinitely and evictions, sadly, may eventually increase.

One get-out clause for landlords could be to sell up, depending of course on post-lockdown demand and what effect it has had on residential capital values. However, even before the onset of Covid-19, the net profit on a sale was – in pro rata terms compared with earlier years – gradually becoming less and less, leaving older landlords, especially, with a dilemma.

Historically capital gains tax (CGT) on property sales was not due to be paid until 31 January in the year following the year of disposal. But, from 6 April this year, CGT has to be paid “on account” within 30 days of the disposal. This, of course, is not a tax increase as such but it does put more pressure on landlords as anyone not meeting the deadline will immediately become liable to interest charges and penalties.

The situation facing one of my clients provides a good case in point as to how landlords are being squeezed. She has a small portfolio of properties, which includes a flat purchased in around 1980 for £17,000 (partly through inheritance and partly through bank borrowings), which has recently been valued at circa £200,000.

“Lucky her!” you might reasonably say. However, her purchase was made on the premise that taper relief, which had the potential to substantially reduce liability to CGT on profits from property held over a longer period, would continue indefinitely. But in 2008 taper relief was abolished by the then Labour government, which had substantial implications for the overall return on every landlord’s investment projections.

You see, the capital value of my client’s property did not just “grow like Topsy”. It involved a lot of hard work (and expense) in making the property lettable, regular internal upgrades to suit changing tastes, negotiating the minefield of statutory repairs, initiating safety and other improvements, and experiencing hassle from recalcitrant tenants.

True, she was receiving regular rental income, but a fair amount of this was put back into the property and even after these expenses tax was still due on net income.

She would now like to sell the property, partly to help her children get onto the housing ladder. However, although in reasonably good health, she is in her 70s and aware of another elephant trap – the 40 per cent inheritance tax (IHT) on anything above the nil-rate band allowance on her estate.

Disincentive

And if she dies within three years money gifted to the children could still be taxed at 40 per cent, albeit gradually reducing to 8 per cent if death occurs after seven years. My client is not self-centred. She accepts landlords should pay tax on both income and capital gains but believes the state’s “take” has become unacceptably high and is a disincentive to those starting out.

Given the government is soon going to need all the income it can get, perhaps there is a case for incentivising “veteran” landlords to sell up if they want to. On the face of it more tax relief should mean less tax income but an alternative could be more takings from elsewhere (e.g. stamp duty) and extra money pouring into the consumer economy (leading to more VAT receipts) could result if IHT rules on “gifts” were relaxed.

Perhaps there’s a lesson to be learned from the late Mrs Thatcher whose decision to reduce higher levels of personal taxation actually resulted in an increase in government income.

David Alexander is MD of DJ Alexander

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