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Question Title: Should a landlord ever sell?
| Question: 414 |
| We have noticed over the past year or so, that there has been a significant increase in the number of landlords selling rather than reletting, when their properties become available for relet. Is this always the right decision?
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| Answer: |
An article in a recent issue of the Sunday Times (April 16 2006) explored this in some detail, and from this we believe that there are some key issues that should be considered.
A quote from a London agent starts the ball rolling, "Capital gains tax (CGT), don't go there! The richest person I know has never sold anything. He has accumulated assets over 25 years (taking in two full property cycles). He started with £2,000, bought one property and has never sold … if I (the agent) had never sold anything, I would be worth three times what I am worth now".
The nub of the question revolves around CGT and the relatively small comparable cost of stamp duty on buying an additional property instead of selling one and buying another. For example; a property purchased for £182,500 six years ago and now worth £320,000, having deducted "entry & exit" costs of £16,000, produces a gross profit of £121,500; from this can be deducted some "taper relief" of a "non-business asset" which is calculated at 5% of the gain after three years and a further 5% relief per year for the next seven years, arriving at a maximum taper relief of 40% after ten years; so in this example, after six years there will be taper relief of 5% after the first three years plus another 5% pa to the sixth and final year, a total of 20%, amounting to £24,300 taper relief; in addition to this there is each individual's Annual CGT Exemption Allowance, which if not used for other investments, amounts to £8,800 pa, or twice that if jointly owner by husband & wife, etc.; so, assuming that the property is jointly owned, the total CGT relief will be £24,300 plus £17,600, total £41,900, leaving a capital gain of £121,500 less reliefs of £41,900. This equates to a CGT liability of £79,600. CGT at a rate of 40% amounts to a tax bill of £31,840…ouch!
This CGT effect, and other high transaction costs of buying and selling (not least being stamp duty) explains why many investors opt not to sell speculatively, whereas with other types of investments there are more attractive CGT reliefs available. Instead, many property investors use the £121,500 capital gain as collateral to buy one or two more properties as in the example in the Sunday Times article.
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