Capital gains: cutting taxes on buy-to-lets could free up houses for first-timers and families

Prime Minister Theresa May doesn’t need to bother building hundreds of thousands of new homes.

She should just give landlords who are sitting on properties that they no longer want a tax incentive to sell them, don’t you think?

That’s what a reader and fellow landlord suggested to me recently and while the idea of the Government giving a tax break to the privileged, multi-property owning class might gross out many people, it actually might make sense.

I mean, there are many landlords who have made shedloads of money out of their rentals, but that means they will have to pay truckloads of capital gains tax (CGT) when they sell.

You might think it only fair that landlords who have seen their investments grow should be heavily taxed and I wouldn’t disagree with you — but that’s not the point.

Rather than pay up to 28 per cent capital gains tax, many landlords are hanging on to their properties so they are not paying any CGT at all.

If the tax were reduced, they might be persuaded to offload those properties, which would release much-needed housing stock for first-time buyers and families.

Of course, this isn’t a new idea. In fact, the Residential Landlords Association suggested this very thing, albeit with a slight twist.

It argued that capital gains tax should be eliminated for landlords who sold to first-time buyers.

Then the Government reduced the tax rates down to a maximum of 20 per cent for the disposal of all investments except residential property.

At the time, it was said CGT wasn’t being cut for residential property gains because the Government earns billions from taxing buy-to-let property sales, but I expect the politicians also felt it could be a vote killer.

Those who want landlords taxed to the gills, of whom I suspect there are really quite a lot, wouldn’t look kindly on a government that gave us a tax break.

However, the Residential Landlords Association survey of 1,500 investors found two in three landlords would be “more likely to sell” if their CGT bill was cut, while 77 per cent would consider selling if the tax was scrapped altogether, so I guess you have to consider, which is more important — releasing more homes or raising more tax?

The reader who contacted me suggested capital gains tax be reduced only for a limited period, and I do think this would create a big temptation for landlords to sell, especially now that their rental income is being taxed more heavily due to the gradual reduction in mortgage interest relief.

Perhaps this is a bit naïve but the way I see it, that would lead to many more properties coming on to the market which would be great for first-time buyers, while the Government might actually earn more from tax as there would be more sales. It’s a potential win-win.

If the cut in CGT was only temporary, it wouldn’t make investing in property any more attractive, so there would be no danger of it pushing up prices.

Of course, canny investors use a number of means to avoid some of their CGT liability on buy-to-let investments, such as by living in properties before they sell them in order to qualify for private residence relief.

This practice, known as “flipping” I believe, has been used by a number of MPs, among others.

Maybe the Chancellor’s friends in the House would welcome a temporary cut in CGT for property investments to save them a lot of flippin’ hassle. Just a thought. Discuss.

Victoria Whitlock lets four properties in south London. To contact Victoria with your ideas and views, tweet @vicwhitlock.