The Conservative Party has unveiled a dramatic tax cut in a bid to encourage landlords to sell properties to their tenants. If the Tories form the next government, landlords who sell their rental properties to the sitting tenants will be spared paying capital gains tax (CGT) on the sale, a tax break worth over £21,000 on average.
How would the policy work?
The 100pc capital gains tax break for landlords who sell to their tenants will be introduced by a Conservative government for a limited period of just two years. It is hoped that the measure acts as a boost to home ownership in the near term alongside other policies aimed to help buyers get onto the housing ladder.
Landlords who want to sell up are reluctant in some cases by tax that is due on the sale of homes other than a main residence. This has created a barrier to properties coming on to the market and worsening Britain’s shortage of available homes for first-time buyers. The scheme will be open to all landlords and tenants across the UK – however there are some catches.
Property investors would only be able to use the exemption if they sell their properties to tenants who were renting from them at the time the day before the announcement – June 10, 2024. This limitation is designed to stop landlords from bringing in tenants they know can afford to buy at the cost of an existing renter who cannot.
Overall it is estimated that thousands of landlords and tenants will make use of the tax break. However, it only applies to individual private landlords and not companies that rent properties. There are currently around 2.82 million private landlords in the UK, according to the latest HMRC data.
How much capital gains tax do you pay on second homes at the moment?
Capital gains tax is due when an asset is sold for profit, including property. While the tax is not owed on main residences – your main home – it is on second properties. That means landlords must pay when selling their rental homes, if the sale results in more than £3,000 profit.
The CGT threshold fell from £12,300 to £6,000 in April 2023, and has now halved to just £3,000 as of April 6 this year. As a result, more people are being dragged into the CGT net.
However, in this year’s Spring Budget the Government reduced the higher rate of capital gains tax for landlords selling their properties from 28pc to 24pc.
The change means that higher-rate paying landlords selling up today pay a slightly lower rate of CGT than last year (though in many cases this is offset by a lower tax-free allowance).
Landlords who pay basic-rate income tax pay an unchanged rate of 18pc.
How much could you save under the Tories’ plan?
Based on Nationwide Building Society’s average house prices, a higher-rate taxpayer disposing of a second home they bought a decade ago for £186,512 would currently pay £19,120 in CGT on gains of £82,666.
A basic-rate taxpayer disposing of the same asset would pay capital gains tax of £14,879.88 on the sale.
Overall, the tax break is expected to cost the Treasury around £20m a year for the two-year term according to Conservative Party estimates.
Do landlords want to sell up?
Landlords have had a rough time over the past decade. Rental yields have practically stood still since 2014 but the gradual loss of tax breaks has increasingly squeezed profits.
The wear and tear allowance, which was worth 10pc of rental income, was scrapped and a cut in the amount landlords could offset mortgage interest against income tax bills means more investors are choosing to sell up. And that’s without addressing the elephant in the room of higher interest rates.
Around 40pc of residential landlords are due to renew their mortgage this year, according to The Mortgage Lender, thousands of whom will be coming off cheap fixed-rate deals. A survey of landlords found they estimated their mortgage costs will rise by £615 a month as a result.
This in turn is likely to push up the rent they charge, potentially pricing out tenants making the property harder to let.
For some landlords then, particularly those with a large portfolio, this could be the impetus for selling lower-yielding properties which no longer deliver worthwhile returns.
Will tenants negotiate lower prices because of the tax break?
The unwelcome truth for landlords is very likely, yes. The policy’s two year deadline sets off a ticking deadline whereby tenants’ bargaining position will continue to grow stronger as the window in which landlords can access the tax break closes. The typical landlord selling a property in 2022 paid £21,260 if they were a higher-rate taxpayer, according to estate agents Hamptons.
In other words, tenants know their landlord stands to save around £20,000 but only if they sell to them.
Landlords should expect tenants to attempt to negotiate a lower price whereby the landlord still benefits from selling to them and the tenant gets a slight discount compared to the market price.
However, landlords who own a “house in multiple occupation”, or HMO, could stand to benefit if more than one tenant wants to purchase the property, effectively creating a micro-bidding war which would push up the property price.
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