Why Landlords are Selling Off Property Portfolios Ahead of the October Budget
The Scottish property market is experiencing a notable trend: landlords are increasingly selling off their property portfolios.
This surge in rental property sales is largely driven by the anticipation of significant changes to Capital Gains Tax (CGT) in the upcoming October 2024 Budget, combined with other pressures such as higher interest rates and a heavier and more costly legislative burden.
Anticipated Changes to Capital Gains Tax
The Scottish property market is seeing a notable trend. Landlords are increasingly selling off their property portfolios. This surge in rental property sales is driven by several factors. The anticipation of significant changes to Capital Gains Tax (CGT) in the upcoming October 2024 Budget is a major one. Other pressures include higher interest rates and a heavier legislative burden.
Currently, the higher rate of CGT on residential property is set at 24%. This follows a reduction from 28% earlier in the year. However, there are growing concerns that this rate could rise sharply to as much as 45% in the October 2024 budget. This potential increase would align CGT rates more closely with income tax rates. It reflects the new UK Government’s approach to addressing a substantial public finance deficit, estimated at around £20 billion.
If implemented, the CGT rate increase would mean landlords selling properties after the budget could face a significantly larger tax bill. For example, a landlord currently facing a 24% CGT rate might see this nearly double. Early sales become a strategic choice to avoid higher taxes. Many landlords are choosing to “crystallise” gains before the new rates take effect, banking on the current, lower rate.
Legislative and Financial Pressures
Beyond tax concerns, landlords face other challenges. Recent Scottish legislative changes have imposed stricter regulations on rental properties. These include energy efficiency standards, rent caps, and safety requirements. These new laws have increased the cost and complexity of managing rental properties. Smaller landlords, in particular, may lack the resources to comply easily.
Moreover, the current interest rate environment is contributing to the sell-off trend. The Bank of England has raised interest rates several times in recent years to combat inflation. This significantly increases the cost of borrowing. This is particularly painful for landlords with buy-to-let mortgages. Their profits have been squeezed as their mortgage payments have risen. Higher mortgage rates, coupled with increased maintenance and compliance costs, make the buy-to-let market less lucrative than it once was.
A Shift in the Property Market
The combination of these factors has led to a noticeable shift in the property market. According to data from Rightmove, almost one in five properties listed for sale was previously a rental property. This is up from 14% a year ago. This marks the highest proportion of former rental properties being sold in over a decade. It indicates a broad move by landlords to exit the market before potential tax changes take effect.
More locally, Simpson & Marwick’s sale data for Q2 and Q3 for Edinburgh let property sales broadly mirrors the UK-wide trend identified by Rightmove.
The Future for Landlords
The phenomenon of landlords selling off their properties is likely to continue, at least in the short term. The expected increase in CGT, coupled with ongoing legislative and financial pressures, has created a perfect storm. This makes holding rental properties less attractive.
For landlords in Scotland and the UK, particularly those with smaller portfolios or high levels of debt, selling now may seem like the best option. It helps mitigate future losses and avoid higher tax liabilities. However, it’s important to note that these changes could also lead to a reduction in the availability of rental properties. This could potentially drive up rents for tenants.
How we can help
By staying informed and considering professional advice, landlords can make strategic decisions that best suit their financial situations in this uncertain landscape.
Simpson & Marwick continue to work with landlords across Scotland to strategically plan how rental properties are held, acquired and disposed.
