Tax burden for UK landlords halved by capital gains tax reform

Landlords who waited to sell their buy-to-let properties until Q2 this year halved the amount they had to pay in tax compared to those who sold prior to the April budget reform, according to research by The Mortgage Works, a leading buy-to-let mortgage lender.

Tracking the cumulative property price increase over the last five years for a £200,000 flat and house bought in the UK, The Mortgage Works calculated that landlords achieved property price appreciation of 43% (houses) and 42% (flats) to Q1 2008.

However, landlords who sold these properties in Q1 2008 faced high CGT charges (£30,597 on houses and £30,241 on flats) which, alongside cumulative income tax over the five year period (£4,298 houses and £4,362 flats), created a total tax burden of £34,895 on houses and £34,603 on flats. In comparison, landlords who sold their properties in Q2 of this year, after CGT reforms saw a flat rate tax of 18% introduced, saw their tax burden fall by just under a half for houses, to £16,581, and just over a half for flats, to £15,975.

Andy McQueen, managing director of The Mortgage Works, said despite recent economic conditions, the buy to let market remained active. "Although the buy to let market has, like all sectors, been impacted by the credit crunch, landlords have continued to buy and sell properties on a regular basis. This has resulted in buy to let forming a higher proportion of net lending than previously seen in the mortgage market."

Figures from the Association of Residential Letting Agents' measuring landlords' desire to sell property also indicate that landlords continue to monitor a variety of market factors carefully when handling their portfolios. While the percentage of landlords who said they had intentions or expectations to sell property jumped from 13.8% in December 2007 to 18.1% in March 2008, possibly in anticipation of the CGT changes, it fell way back to 7.3% in June 2008, suggesting landlords were choosing to bide their time in a market of falling house prices.

McQueen added: "Good buy to let investors always treat their property portfolios as a long-term investment, and the ARLA figures show that contrary to having to offload properties, many landlords are choosing to hold onto their investments until house prices begin to either stabilise or increase."

Regional breakdowns for London, the South East and the rest of the UK revealed that landlords who bought outside of the capital and South East achieved the greatest reduction in their tax burden by waiting to sell their property in Q2 this year.

With cumulative house price appreciation at its highest for the rest of the country (48% for houses and 53% for flats) and rental yields greater than the rest of the UK, landlords faced total tax burdens of £41,742 (houses) and £46,423 (flats) in Q1 2008. However, after CGT reform this tax burden was reduced to £24,454 (houses) and £19,494 (flats) for landlords who sold in Q2 2008.

Landlords who bought investment properties in London and the South East also experienced roughly 50% decreases in their tax burden following the reform to capital gains tax. However, the cumulative increases in property prices in these regions were far smaller over the five year period, accounting for lower taxable rental income and reduced gains on capital.

Andy McQueen continued: "Landlords outside of London and the South East experienced considerable price increases between 2003 and 2008 and subsequently made substantial returns on their investment properties. However, with these returns came large tax burdens and it is clear that those who sat tight and waited to sell in Q2 2008 instead of Q1 really saw the benefit of the Government's CGT reform.

"However, it is sensible to remember that buy-to-let investing is done best with a long-term perspective. While house prices might have slowed recently the outlook is still promising and those with investment properties now should be encouraged to continue renting them out instead of selling."