New tax threat could hit landlords hard
A rather un-conservative report has been released today by the Government that, if acted on, threatens to double the tax on the sale of second homes and rental properties. This is likely to hit the Conservative party’s own voters hard but could raise £14 billion in much-needed tax revenue to help pay for the Covid crisis.
Once again, landlords who have already faced a number of tax increases in recent years, are in the frame. The tax hike would mean cutting existing exemptions on property sales and doubling current rates of Capital Gains Tax paid on the sale of properties that are not the owner’s main residence.
The Treasury's own Office for Tax Simplification, which has prepared the report, says £14 billion could be raised by cutting exemptions and doubling rates. It proposes bringing CGT into line with income tax and ditching the £12,300 exemption threshold.
The current system benefits landlords because many are able to assess when to sell a rental home and organise their finances so that any profit they make on the property comes just in below the threshold. Even when CGT is paid, the rate is still half that of income tax.
However, despite the temptation to use landlords as easy pickings for increased tax revenues at a time when they are badly needed, any move in this direction could have unintended consequences.
First, any hike in CGT will discourage landlords from selling properties, reducing transactions and consequently reducing the amount of CGT that goes to the Treasury.
Second, any additional CGT directed at landlords will add to their already hefty costs, encouraging them to increase rents. In a sector where demand is already outstripping supply and more people are likely to turn to renting as the post-pandemic economy falters, this is far from a positive outcome.
And third, while the majority of the country with no second home to sell, would be largely unaffected, landlords who would feel the full impact of any change in this direction are likely to now be considering their options. They will be actively looking for tax efficient ways to protect their property assets, again potentially reducing the sums that end up in the Treasury’s coffers.
The Treasury has been quick to emphasise – probably for the benefit of Tory backbenchers and voters – that the Government is under no obligation to act on the recommendations of the OTS report. Landlords will be hoping that post-pandemic, recovery is swift and this report sinks without trace. We will be watching this story with interest.
Author : Maryanne Bowring