Landlords will pay more CGT on selling properties in an SPV
The UK budget has included a change to special purpose vehicle (SPV) regulations that will require landlords to pay more capital gains tax when selling a property, as a result of a freeze of their indexation allowance. Formerly, investment properties held in an SPV attracted a lower level of tax when they were sold. The move may dent the buy to let market further after the Prudential Regulation Authority brought out regulations in October that have complicated the financing of investment property purchases.

What does the UK property market currently look like?

Whilst the new Stamp Duty relief scheme stole the headlines, quietly in the budget small print was the news that those who invest in property using a Special Purpose Vehicle (SPV) will, as of next year, pay an increase in Capital Gains Tax when they sell the property, due to a freeze on indexation allowance. Prior to this latest move, using an SPV as a way of holding investment property meant that a lower amount of tax was payable when such a property was sold. It’s the latest in a line of changes that have increasingly meant that Buy To Let isn’t the straightforward investment that it used to be a few years ago. We’ve already seen changes in the way that rental income is taxed, which although being phased in over the next two years will mean an increased personal tax bill for Landlords in January who still own properties in their own name, rather than under an SPV. Buy To Let lending legislation has also changed, with new rules being introduced by the Prudential Regulation Authority in October, making it more complicated to obtain lending to finance the purchase of an investment property.

GETTY Those who invest in property using a SVP will pay more when they sell it

Now, with this latest change in tax meaning that landlords will not only pay more tax on their rental income, but also any profit that they make from an increase in the value of a property over the time they own it, it’s easy to understand why many investors might start to question the viability of their portfolios. The problem is, the demand for quality, privately rented housing remains strong in most areas of the UK, and therefore if more landlords choose to exit the market as a result of increased taxation, whilst this may assist some First Time Buyers to get on the property ladder – which it would appear is what the Government intended as an outcome when changes were announced in 2016 - it may also cause issues elsewhere in the property ecosystem due to a decrease in available rental properties. If we look at the headline figures, you can see where the issues may lie. According to the latest data available from the Department for Communities and Local Government, there are currently an estimated 23.5million residential dwellings in the UK. 14.7million are owned by their occupiers, either with or without a mortgage. Approximately 4.7million are rented privately from landlords, whilst circa 4million dwellings are provided by social housing.

GETTY Out of the 23.5million residential dwellings in the UK, 4.7million are rented privately

Due to the fact that, over the last few years, it’s become harder to get a residential purchase mortgage due partly to the stricter lending criteria introduced in 2014 as part of the Mortgage Market Review, as well as rising house prices together with fewer homes available on the market to buy all making it harder for would-be purchasers to buy, the demand for quality private rented housing in the UK has grown. For example, predictions from consultants PwC suggest that an additional 1.8million privately rented homes will be required by that in 2025, which would represent a significant increase in the current levels of lettings stock available. Yet with increased taxation and costs of ownership, Buy To Let is looking less and less attractive to some landlords who are now selling up their portfolios. Meaning that, ironically, there is less rental stock available in the market in some areas, which has led to upwards pressure on rents in many parts of the UK. In fact, in their latest Buy To Let index released this week, national letting agents Your Move suggest that rents have increased on average at 2.4% so far this year.

SUBSCRIBE Invalid email We use your sign-up to provide content in ways you've consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info

Cities such as Norwich and Cambridge have seen 6% rises in rents over the past twelve months, with the average monthly rent in the UK now at £887. As Brian Murphy, Head of Lending for Mortgage Advice Bureau, who’s Best Buys for Buy To Let mortgages has been released today explains, “Whilst interest rates remain at historic lows, it’s easy to see the initial attraction of investing in property. Returns on straightforward savings are still very low, and historically, as an asset class property has performed exceptionally well, and rental demand continues in many parts of the UK. That said, Buy To Let has become more complex to navigate over the past few years, not just in terms of taxation but also increased regulation, for example with Right To Rent checks and increased health and safety measures. Whereas previously, investing in property may have been perceived as an easy way to make money, it now takes a lot of preparation and an ongoing commitment by investors to ensure that they stay on top of their paperwork and property management in order to ensure that their asset maintains it’s viability.