Capital Gains Tax (CGT) is a tax charged on the profits made when an asset is ‘disposed of’. For landlords this normally means that they face a significant bill whenever they sell part of their portfolio which has appreciated in value.
CGT is not payable on the sale of an individual’s main residence, provided that they are entitled to full Private Residence Relief. However sale of any other property, land or interest in land - like rental property - where a gain is made will generally be chargeable.
Since 2007, there have been a number of changes to the way in which CGT is charged, including the removal of many reliefs previously accessible to landlords.The current rate applicable to qualifying gains made on the sale of property is 28 percent, and is payable irrespective of whether a landlord intends to reinvest these gains.
This is not the case for other 'businesses' which may take advantage of roll-over relief if they intend to reinvest their gains. Upon disposal of many business assets , businesses are able to claim ‘roll-over’ relief against CGT provided that the gain is reinvested in the business.
For instance, a company may sell land or buildings used for the purpose of their trade and claim tax relief against any profit made on the sale provided that the gain is reinvested in the business. Hence encouraging reinvestment and the development of the company. Such relief also allows a degree of flexibility, allowing businesses to target their resources in the most appropriate manner, as needed.
Landlords, when disposing of any part of their portfolio, may not take advantage such ‘roll-over’ relief in respect of residential property by virtue of the Taxation of Chargeable Gains Act 1992. This means that private-residential landlords are faced with a considerable barrier to disposing of property, which represents their most important assets in connection with their lettings business. This hinders continued investment in their business, reducing the flexibility of the PRS and the ability of landlords to adapt to changing markets. It also means that landlords are less able to recover from potentially poor investments and provide housing where it is most needed.
It is the NLA’s belief that landlords selling property and reinvesting the funds released should be able to do so without being presented with a significant CGT bill.
Private-residential landlords should have access to the same level of ‘roll-over’ relief available to other businesses and CGT should be charged only on gains released from a business as profit.
It is also crucial to differentiate between assets held on a long-term basis as an investment or aspect of business and those intended for short-term speculation. HM Treasury must do more to reduce the burden on landlords by introducing a mechanism which reduced a landlord's exposure to CGT relative to the time which they have owned their property. This could be achieved by the reintroduction of taper relief or the use of a diminishing CGT rate.