Andrew Hubbard

Written by: Andrew Hubbard

Andrew Hubbard

Consultant

Tax relief plan for landlords and tenants not as simple as it sounds

An interesting idea has been floated by the Conservative think-tank Onward to tackle the housing crisis – a reform of the capital gains tax treatment of rented property. 

The Chancellor is known to be interested in this as an idea and we may hear more about it in the Budget. There is certainly a case to be made for reform. However, if there is to be a change, the practicalities as well as the economics need to be properly thought through.

The basic idea is that if a private landlord sells a property to a tenant who has lived in it for more than three years there should be a 50 per cent relief from capital gains tax. The tax on the other 50 per cent should be passed to the purchasing tenant by HMRC in order to fund (in whole or part) the deposit to acquire the property. 

That sounds deceptively simple, but it also raises many problems. To start with, would the 50 per cent relief mean that only half the gain would be taxable or that the entire gain would be taxable at 14 per cent rather than 28 per cent? Those sound the same but could produce very different results depending on the tax profile of the vendor. 

What about losses? If the landlord has capital losses (or other reliefs) available, he/she might not pay any tax on the gain anyhow: so would the tenant get 50 per cent of nothing as his/her subsidy from HMRC? 

And that leads to a wider issue. Suppose I am the tenant and I do buy from my landlord. When do I get the money? Immediately or when the landlord pays the capital gains tax, which could be months later? And how would I know whether I have got the right amount? Would I have the right to audit the figures or would I have to accept what I was given? Would there be an appeals process?  

And what about multiple occupation? Say that there are three tenants – A and B who have been there for more than three years, and C who has been there for two years? Suppose it is A and C who are the purchasers, how would it work then? 

And would the relief apply to companies (given that many private landlords have now incorporated their property businesses) or overseas property owners?  

Then, how would the tenant actually get the money: a direct payment into his/her bank account or a credit against other tax liabilities? This would mean that if they were not in self-assessment they would need to complete a tax return. 

To raise these issues is not to pour scorn on the idea: far from it. It is right that the taxation of property should be looked at from all angles. But even these few initial questions show that the path from policy idea to implementation is never straightforward.   

The Onward paper deals with a number of other property tax related measures including proposing some radical reforms of the relief which is due when an individual lets out his or her home for part of their period of ownership. I am not completely convinced by the logic of all of this and I think that there is confusion at times between properties which were at one time the owner's main residence and those which were always rented out. More work would be needed to clarify this. The paper estimates – and it accepts that this is only a broad-brush approach – that, in total, nearly one million households could benefit from the proposed tax changes – ie would move from renting into ownership. I leave to others more expert in the field than me to evaluate this, but I have to say that it does seem very optimistic.

We need new thinking about how property is taxed. Not that long ago, mortgage payers got tax relief on their interest payments. That was a sacred cow of the tax system and it was thought inconceivable that any government could abolish it. But it went, and now it seems extraordinary that such relief was ever available. So radical changes can be made to key parts of the tax system. Whether or not this particular proposal is something which could, or should, be implemented will need very careful thought. Of course, the really radical change would be to abolish the capital gains tax exemption for main residences completely.

Now although Chancellors like to spring surprises in the Budget, somehow I don’t think that we will be seeing that particular rabbit being pulled out of the hat.

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