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GlanzMore than 1.4 million properties in the UK are funded by a Buy-to-Let (BTL) mortgage. Yet as the property markets struggles to find any pace of recovery, thousands of investors are trapped with illiquid assets. Could a simple tax change help investors ease their property woes and provide renters with better quality property? Cllr Jonathan Glanz explains.

The housing market boom of the late 90’s and early 00’s lead investors to plough savings, speculative cash and borrowings into the property market. Over a decade buy-to-let became a household name, with daytime television and evening prime time filled with wall-to-wall programming on how to make a fortune from your personal property empire. Brits wanted to be a property owning democracy, but were no long satisfied with just one set of keys. A total of £159.4 billion is now owed on BTL mortgages (12.8% of all mortgage lending).

This new national pastime also created hundreds of thousands of first-time landlords, with just one or two properties and zero experience.

As the recession hit, many of these first-timers had their fingers burnt with tenants failing to pay rents and property price falls plunging them into negative equity. Others had substantial paper profits but no means of exiting what had for them become a headache, rather than the easy win sold to them by the wall to wall TV programmes that glossed over some of the more tedious practical aspects of owning rental properties. But no one is running for the exit, largely because they are put off by the prospect of triggering Capital Gains Tax (CGT) where the property is pregnant with gain and trying to replace their income streams from the net amount available to reinvest given the lack of return from other investment classes. A new exit route is needed.



An institution, probably a Real Estate Investment Trust (REIT) (the “New Fund”) which takes ownerships of the properties in exchange for an equivalent share holding in the fund would allow landlords to “cash in” their property investment and downsize their risk, while remaining connected to the upside of property investment.

A REIT is a company that manages a portfolio of real estate to earn profits for shareholders. REITs can be very tax efficient, as the property company pays no corporation or capital gains on the profits made from property investment.

Opening the New Fund as a vehicle for landlords to trade in small property holdings would create a large well managed group to provide a better service for both residents and an exit route for landlords – professional management, greater choice, and legislative compliance.

POLICY NEED:

Regulatory change is required to allow the rolling over of capital into the New Fund, without creating immediate CGT liability.

CGT liability remains on the whole investment gain and is rebased calculated from the property purchase price relevant to the share holding.

POLICY GAIN:

Place a requirement on the New Fund to provide a set percentage of affordable housing.

A higher percent requirement could be encouraged with a higher tax relief to deliver more affordable housing. This increases the availability of affordable accommodation and any reduced revenue to the individual investor is negated by the efficiency gains of running a larger fund.

Without loss to the Treasury, benefits are delivered across the market.

For the property owner disposing into the New Fund, the benefits are:

  • Exit from the headache of direct property holding, whilst maintaining the overall value from which to create their income from dividends from the New Fund.
  • Spreading risk, through geographical and property diversity and providing a guaranteed income.
  • Retain connection to market upside on a ‘basket’ of properties.
  • Elimination of personal liability of BTL mortgage

For the tenant, the benefits are:

  • Guaranteed quality threshold, ensuring all properties in the New Fund meet strict quality criteria.
  • Professional landlord service – efficient servicing, contracts and fixed point of contact.
  • Legislatively compliant property, e.g. gas certification, electricity installations.
  • Improvements in property through energy efficiency and cheaper running costs – access programmes such as Green Deal which will be very difficult in normal tenanted property.

For the New Fund, the benefits are:

  • Aggregation and scale from a property portfolio diversified by location and type.
  • Ability to transfer BTL debts into corporate borrowing, reducing rates and costs.
  • Guaranteed and proven source of income from a wide range of properties.
  • Solid asset base against which to borrow and reinvest.

For the Treasury/Government, the benefits are:

  • Improves the standard of rental property on the market with a quality threshold.
  • Likely to be little/no revenue loss to the Treasury as the pregnant Capital Gains Tax would be transferred to the shareholding in the New Fund, as calculated back to the original property purchase price.
  • Efficient collection of taxes falling due, including CGT and income taxes.
  • Encourages new entrants into the property market to provide for an expanded rental sector to meet demand.

The promise of a fiscal wrapper for let residential property within SIPPs – made, and then rescinded on by the last Labour Government – drove behavioural change which would have provided additional properties for rent.

By accepting this simple change to allow the roll over of pregnant CGT, I believe significant numbers of poorly managed or currently void rental properties could be brought back into use and occupation. Government can provide an attractive vehicle for further investment, much of which include the provision of affordable homes for rental with the added bonus of helping get the market moving again.

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