Landlords feel the pinch
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GROWING numbers of buy-to-let landlords are quitting the market to escape the Government’s tax crackdown, only to face a hefty capital gains tax bill when they sell their property instead.
Most of these are smaller “amateur” landlords who bought one or two properties to boost their retirement income, only to find their sums no longer add up, due to cuts in tax relief and extra red tape.
This has brought a double windfall for HM Revenue & Customs (HMRC) as it takes more income tax and stamp duty from existing property investors, while enjoying a surge in capital gains tax
(CGT) receipts from those selling up.
The nation’s total CGT bill jumped 18 per cent to a record £9.2 billion in 2019, partly due to landlord sales, handing the Treasury an extra £1.4 billion.
Former Chancellor George Osborne’s tax attack on buy-to-let, launched in 2015, has slashed landlord profitability.
Measures included a 3 per cent stamp duty surcharge on purchases, cuts to wear and tear allowances, and phasing out higher rate tax relief on mortgage interest.
From April, the maximum relief landlords can claim is 20 per cent, even if they pay income tax at 40 or 45 per cent. The number of “smaller” buy-to-let landlords with between five and nine properties fell by 2,000 to 157,000 in the 2017/18 tax year, the latest for which official figures are available, and many expect the downward trend to accelerate.
Jonathan Green, partner at accountancy firm Moore, said another tax change coming into force from April will hit “accidental” landlords, who let out their previous home rather than selling it.
They enjoyed a CGT exemption for 18 months of capital gains while it was rented out, but this will be cut to just nine months. It will remain at 36 months for long-term care home residents and those with disabilities.
Green said this will be the last straw for many: “Rental profits have been squeezed to the point where buy-to-let no longer makes financial sense for some.”
Higher and additional rate taxpayers are charged CGT at 28 per cent on property sales, against 20 per cent for other assets, with the first £12,000 free of tax.
Anyone who faces a CGT bill, for any reason, could defer it by reinvesting gains in the Enterprise Investment Scheme
(EIS), set up by the Government to boost funding for small unquoted firms.
You have up to three years to take advantage, so for example, a gain made in June 1, 2017 can be invested in an EIS up until May 31, 2020.
Gary Robins, head of business development at investment specialist Growthdeck, said you can even claim back CGT you have already paid: “It would then not become payable until you sold your EIS shares.”
Investors can also claim 30 per cent income tax relief on money invested in an EIS. “CGT and income tax relief would reduce the cost of investing a £100,000 capital gain to just £42,000,” he added.
However, investing in an EIS is not for everyone because small unquoted businesses and start-ups are relatively risky, and independent financial advice is essential, to work out if it is right for you.