Getting amateur landlords to use tax efficient management companies could free up empty homes
The housing market boom of the late 1990s and early 2000s led investors to plough savings, speculative cash and borrowings into the property market. Brits wanted to be a property owning democracy, but were no longer satisfied with just one set of keys. A total of £159.4 billion is now owed on buy-to-let mortgages (12.8 per cent 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. But no one is running for the exit, largely because they are put off by the prospect of triggering capital gains tax, 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, which takes ownership 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, because 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 residents and an exit route for landlords - professional management, greater choice, and legislative compliance.
If there was a requirement placed on the new fund to provide a set percentage of affordable housing there would be a major policy gain for government and practical gains for local people.
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.
The government can provide an attractive vehicle for further investment, much of which could include the provision of affordable homes for rent with the added bonus of helping get the market moving again.
Jonathan Glanz is cabinet member for housing at Westminster Council