Buy-to-let crunch: 'I was forced to sell my 44 properties, here's how I saved £250k in tax'

Thousands of property investors being forced out of the sector by punishing tax reforms are finding that selling up causes a tax headache all of its own.

Landlords are trying to adapt their businesses to the tougher new tax regime after the Government restricted the relief offered on mortgage interest and limited the amount that can be offset against wear and tear for tax purposes.

The final straw for many is the planned withdrawal of “section 21”, a rule that allows landlords to evict problem tenants easily.

But those who dispose of their properties face a hefty tax burden nonetheless. Former landlords can be left with six-figure capital gains tax (CGT) bills when they sell, and large inheritance tax (IHT) liabilities further down the line.

David Smith of the Residential Landlords Association, a lobby group, said: “It is completely illogical to have a tax system which encourages investors to pull their money from the sector but then hits them with a massive tax penalty when they do.”

Tax battles

It was 1971 when Ossie Hall was posted to Hong Kong as a young lieutenant in the Army. He decided to let out his property in Hornsea, East Yorkshire, and use it as a nest egg while he served.

Over his decades in the Army, during which he reached the rank of colonel, he built up his property empire to 44 rental homes around Hull and the East Riding. After his military career ended, this delivered him a stable income to support his family and fund his retirement.

Now 73, Colonel Hall has been driven out of the market entirely. “It costs so much to run properties these days,” he said. “Mine are all above board, but it is too much for me. The tax and bureaucracy are crazy.”

But, as many landlords are discovering, the decision to sell is proving equally expensive. Col Hall faced a large CGT bill on the sale of his properties; now there is a potentially huge IHT liability when he dies.

To date, the sale of his properties has generated a total capital gain – the increase in value between purchase and sale – of more than £900,000, which would normally have resulted in a tax bill of £250,000. CGT is chargeable at 28pc on residential property not occupied by the owner.

“This isn’t London; some properties have increased in value by £5,000 or £10,000, some by £50,000. But it quickly mounts up,” he said.

There are several methods landlords can use to stop the taxman in his tracks. Advised by Vijay Pandey of Warren & Warren, a financial planner, Col Hall was able to take advantage of tax-efficient investment opportunities to help him cut his tax bill. This included using “discounted gift” trusts and the Enterprise Investment Scheme (EIS).

Col Hall has put around £420,000 in the EIS, which involves investment in fledgling, often unlisted companies. This will ultimately defer £117,000 of his CGT and also gives him income tax relief of 30pc for the current tax year, allowing him to offset £30 of every £100 invested.

While the CGT deferred has to be reinvested when each EIS investment matures to keep the tax break, the income tax relief is his to keep, provided that he holds the EIS assets for a minimum of three years.

Should Col Hall hold the schemes for more than two years, they will be excluded from his estate for IHT purposes. This will save his two children £160,000 in death duties.

Generating cash

Having lost his rental income, Col Hall needed to generate cash. He now has three discounted gift trusts, which earn him £2,400 a month. Using these trusts has also generated an immediate IHT saving of £134,000, with a further £126,000 saved if he survives seven years after placing the money in trust.

Mr Smith called on the Government to give better support to the rental sector. “Landlords are leaving the market at a time when demand continues to increase,” he said. “We need a complete change of policy to recognise the need for more rental homes, not fewer.”

Col Hall is down to 10 properties and hopes to sell them soon. He said landlords should still be able to turn a profit if they invest wisely.

“My advice is ‘don’t buy anywhere where you wouldn’t feel comfortable taking your mother at night’,” he said. “And when tenants do a runner without paying, you shouldn’t chase them for cash because it’s a waste of time.

“Write it off, give the house a lick of paint and get new tenants in.”

Are you a buy-to-let landlord that is selling up? Leave your stories in the comments section below.