Farcical Capital Gains Tax system restricts investment in homes

Root and branch reforms are needed to the Capital Gains Tax system to help tackle the rental housing supply crisis. 

Every home available to rent currently averages 10 enquiries - double the pre-pandemic average - according to data published by Rightmove. The shortage of rental homes is making it harder, particularly for younger people, to access work and educational opportunities.

This is being exacerbated by a tax system that discourages investment because it cannot distinguish between genuine gains and price increases resulting from inflation.

In advance of the Budget, the National Residential Landlords Association (NRLA) found that between 2015 and 2024 just one-fifth of the increase in house prices represented real-terms gains, with the remainder attributable to inflation. Despite this, all price appreciation - with the exception of certain capital costs - is treated as if it were profit and taxed when a property is sold.

To address this, the NRLA is calling on the Chancellor to use his first Budget Statement to announce fundamental reforms to Capital Gains Tax to support long-term investment in rental housing and help tackle the shortage of homes to rent.

To create a fairer system that supports the long-term provision of rental housing, the NRLA proposes:

• Tax gains not inflation. Capital Gains Tax should apply to genuine gains, not gross increases in property values. The acquisition price of a property, and any qualifying capital expenditure should be adjusted for inflation before calculating the true real terms gain on disposal of a property.
• Recognise long-term use. The relief available must recognise the time a property is held and productively used to provide accommodation. Where a property is bought and sold speculatively over a short-term no relief would apply. This would recognise long-term investment rather than short-term property ‘flipping’

Safeguards would ensure the relief could not create or increase an allowable capital loss or exceed the inflation actually experienced. Genuine increases in property values would remain subject to Capital Gains Tax.

The purpose of the reform is to prevent inflation being taxed, and to preserve the purchasing (or investing) power of money released by the sale of a property.

Ben Beadle, Chief Executive of the National Residential Landlords Association, said:

“All regions of this country desperately need more homes to rent, yet our tax system fails to encourage landlords to make e long-term investments to provide them.

“It is absurd that investors face Capital Gains Tax on increases in property prices that are simply the result of inflation. That's not a real gain, and it shouldn't be treated as one.

“Taxing inflation devalues the worth of an investment, and any potential return. If nothing changes potential investors will be better off leaving cash in the bank, where they face none of the risks or difficulties inherent with providing homes.

“The Chancellor has an opportunity to put this right. A fairer Capital Gains Tax system that recognises inflation and rewards long-term investment would help rebuild confidence in the sector and support the supply of rental homes.
“If we want renters to have more choice and affordable places to live, we need a tax system that encourages investment rather than undermining it.”

-ENDS-

Notes

• According to Rightmove, the average rental home received 10 enquiries, compared to the pre-pandemic level of 5. See details here.
• The NRLA’s full Budget submission can be accessed here.
• Further information about the NRLA can be found at www.nrla.org.uk.  It posts on X @NRLAssociation.
• The NRLA’s press office can be contacted by emailing [email protected] or by calling 0300 131 6363.