Will Labour Scrap Incorporation Relief for Landlords along with Increasing CGT to trap landlords into the business of letting?

With Labour now in power, landlords across the UK are bracing for potential changes in the next budget. Among the most pressing concerns is the possibility of the government scrapping incorporation relief for rental property businesses. If this comes to pass, and is coupled with an increase in Capital Gains Tax (CGT), it could create a difficult situation for landlords – trapping many in a “hold and wait” scenario. Here’s how these changes could play out and what they might mean for the rental market.

1) Could Incorporation Relief and CGT Hikes Become a Double Whammy?

Incorporation relief has been a vital tool for landlords looking to transition their property portfolios into limited companies without triggering hefty CGT bills. This has been a popular strategy for those wanting to future-proof their investments, managing tax more efficiently while ensuring long-term flexibility.

But Labour’s potential move to scrap incorporation relief could close off this restructuring option, leaving landlords with limited routes to efficiently manage their portfolios. If this is combined with a hike in CGT – another widely speculated move – landlords who were planning to sell or restructure could find themselves stuck.

Higher CGT would raise the cost of selling properties, making many landlords hesitant to sell, hoping that a future government might reverse these increases. At the same time, removing incorporation relief would make transferring properties into a limited company an expensive proposition, triggering CGT liabilities that were previously avoidable. This double hit could force landlords into a “hold and wait” strategy, delaying decisions in the hope of more favourable tax policies down the road.

2) The Impact on the Rental Market

If these changes come to pass, we could see fewer landlords restructuring their portfolios and even fewer selling properties, as the CGT increases make exits more costly. This hesitation could lead to a stagnation in the number of rental properties available on the market, which could further squeeze the already strained rental sector.

The reduction in restructuring options may also dissuade new landlords from entering the market or expanding their portfolios, further reducing the supply of rental homes. For tenants, this could mean higher rents as demand continues to outpace supply – all while landlords are left juggling higher taxes and rising costs.

3) What Should Landlords Do Now?

While nothing is certain yet, landlords should be prepared for potential changes in the budget. Scrapping incorporation relief, combined with CGT hikes, would create a challenging landscape for those looking to restructure or sell their properties. As a result, many landlords may choose to hold onto their investments longer, waiting for more favourable conditions.

It’s important for landlords to stay informed about upcoming policy changes and consider the potential implications for their portfolios. Staying ahead of the curve will be essential as the government’s tax and housing policies evolve.

At Property118, we’ll be monitoring these developments closely and keeping you updated. For now, understanding how these possible reforms might impact your plans is key to navigating the road ahead.