But delving a little deeper suggests that some landlords could be significantly worse off. The proposal suggests that landlords be given a 50 per cent capital gains tax (CTG) exemption on the profit generated from selling a property to a tenant who has been in place for three or more years. The tenant receives a one-off payment equivalent to the 50 per cent that the landlord would pay in CGT, thus giving the tenant a significant helping hand towards the deposit. Sounds good all round, but it’s not, because the tenant gift has to be paid for out of the Treasury, and could cost over £1bn a year. As with all such largesse, it has to come from somewhere.
In theory, if you sell a second home and you are a higher-rate taxpayer, you pay 28 per cent CGT; in reality you don’t. The tax liability can vary enormously. For a start, you only pay 18 per cent if you’re not in the higher tax bracket. As an example, if you live in a house and then rent it out (while you are abroad for example) there is no CGT liability for when you lived there. There is also relief on the last 18 months you owned the home even if you didn’t live there. This is known as residential relief. You can then claim lettings relief, which is the lower of the amount of private residence relief, the net gain realised on the letting or £40,000, or £80,000 if the property is in joint names.
There is also the individual annual exempt amount of £11,850 per head. Taking all of these into account and using the example of a £120,000 gain on a house owned for eight years and lived in for two years would mean no CGT liability at all.
So, in this case, giving landlords a discount is pretty meaningless until you come to the bit that suggests doing away with lettings relief altogether in order to pay for the hand out to tenants. In the above case, the landlord is £40,000 or £80,000 non-taxable relief worse off. Onward also suggests reducing from the last 18 months to six months the relief on owning the home.
However, in many cases where there is considerably more capital appreciation and where the property never served as a principle residence for the landlord, the scheme has merits. But there are big question marks. Most tenancy agreements don’t run for three years. Furthermore, the scheme would give tenants the chance to buy the home they are renting, but presumably only if the landlord is prepared to sell. An estimated 88,000 households could take up the scheme each year, which would help to slow the steady decline in home ownership where the number of 25-34 year olds owning their own home has fallen in the 10 years to 2017 from 55 per cent to 35 per cent. And, according to the Institute of Fiscal Studies, home ownership in people aged 25 to 34 and earning between £22,000 and £30,600 is down from 65 per cent in 1995 to just 27 per cent in 2016.
Giving people a chance to buy their first home has to be applauded, but it’s not so good for those still left behind who have not lived in their current rented home for three years, or for those who could still not afford to buy. This is particularly prevalent in areas of high housing costs such as in the big cities. Selling off rented homes would also serve to reduce supply, which could push existing rents higher. There is a hope that the build-to-rent concept to step in to increase the number of properties for rent. These would not be eligible for the CGT scheme, though, which would only apply to properties already being rented out. And the number of new build-to-rent properties coming onto the market would not be enough to make up for the shortfall if all eligible tenants were able to take up the offer. It’s also worth remembering that a lot of landlords opted to operate as a company to offset some of the new taxes introduced last year. As such, they do not pay CGT on disposal profits but instead pay corporation tax. And that’s just 19 per cent.
