Nine out of 10 landlords said they oppose the Capital Gains Tax proposals, which are expected to abolish the current flat rate of 18% payable on capital gains, replacing it with a tiered system which would tax capital gains at a rate corresponding to income tax levels.
It is thought that some individuals would be liable to pay CGT at a headline rate of up to 50% if the changes are applied on this basis, though the government has indicated it will ensure entrepreneurial relief.
But experts are still unclear whether this relief would apply to buy-to-let investors, or whether the taper relief which existed before the flat rate of 18% would be reinstated.
LSL Property Services, the residential landlord that owns estate agencies Your Move and Reeds Rains, asked 860 landlords and property investors about their attitudes to the proposed reform of Capital Gains Tax.
71% of landlords surveyed said an increase in CGT will make them reconsider future investment in rental property, which LSL said could have serious consequences for the private rented sector.
Simon Embley, CEO of LSL Property Services, said: “Over the past two years, investment properties have accounted for 30% of sales across our network – over 40,000 transactions.
"Foisting a tax-hike on property investors will drive many from the housing market – at a time when its recovery is still perilously fragile.”
As levels of home ownership deteriorate, housing experts have suggested that the private rented sector will have to pick up the overflow of housing demand.
LSL said that although 30% of landlords gave equal importance to rent and capital appreciation, 36% of those surveyed considered capital gains the most important aspect of property investment. Of these, a quarter stated that they only consider capital gains when judging an investment.
The average landlord signed up to LSL owns five properties which specialist buy-to-let lender Paragon managing director John Heron said could skew the numbers slightly.
In his opinion, the behaviour of larger professional landlords is more critical for the sector, as these landlords hold the majority of property.
Paragon also undertook its own survey of 1,200 landlords, which it says accounts for in excess of 10,000 private rental properties and assesses the behaviour of the professional end of the market.
Paragon’s results showed that 48.6% of landlords invested in rental property to benefit from a mix of capital growth and rental income, and 16.1% invested for capital growth only.
Heron told Mortgage Introducer: “I can understand a negative reaction from landlords and indeed the wider business community about the proposed changes in CGT, but I think in reality it’s unlikely that we’ll see landlords trading out in those sorts of numbers.
"Partly because it’s unlikely landlords will have the time to trade out before the changes come in, and mainly because history has shown us the majority of landlords hold properties for the long term.”
Future investment
Figures from the Association of Residential Lettings Agents (ARLA) show that the average time a property is held for is 17-years.
Embley is concerned about the effect of CGT on future investment.
He said: “If potential landlords are discouraged from investing, we will see a large proportion of the demand for house purchase disappear, and house prices may fall. A further fall in house prices will see more home-owners in negative equity potentially triggering a significant rise in repossessions as owners lose confidence in the market.”
As yet there has been no indication about relief for long-term investors, which many buy-to-let landlords are.
If no distinction is made between long and short term investors LSL says that under the new tax proposals, long-term investors will suffer the most.
For instance, in the last twenty years, the average house price has risen from £44,880 to £168,202.
This means that an investor who bought in 1988 and wanted to sell would be liable for tax on 40% of £113,222.
As a result, an investor who bought twenty years ago as part of a retirement strategy will face a tax bill of £45,288.
Of the landlords still committed to the private rental sector, 41% are unable to sell property before the tax is introduced because their property portfolio represents their retirement plan.
Embley added: “If CGT is to be overhauled, we need to see the reintroduction of taper relief.
"As it stands, the new tax regime will rein-in future investment – not to mention hammer investors who have already bought second homes for a retirement nest egg.
"Prudent property investment is a long-term venture, and the new government needs to take this into account, not penalise it.”
Heron agreed, saying: “I think it’s important that the industry expresses a clear view to government of the importance of private rented property to UK housing and the importance of maintaining motivation of landlords to hold and expand their portfolios of property to rent.
“There’s a strong argument to be made that landlords are operating valuable businesses and that those businesses are entrepreneurial.”
Taper relief
Taper relief was originally introduced in 1998 before being replaced by entrepreneur relief in April 2008.
It exempted a percentage of an investor’s capital gain depending on how long the asset was held.
For example, a property sold after three years would qualify for the minimum of 5% taper relief, whereas a property held for ten years would qualify for the maximum of 40% taper relief.
Embley added: “The private rental sector is vital to housing the UK’s growing population.
"There is a chronic shortage of residential housing available – and this is going to get worse.
"Social housing will not cover the shortfall. The government needs to encourage the growth and professionalisation of the sector – not deter it.
“This potential new tax regime will discourage institutional investors as much as it will private landlords from entering the market.
"We would like to see the government encouraging investment from trusts and property funds by abolishing stamp duty for property investment vehicles like REITS, and waiving the 2% fee these trusts face when entering the market.”
