For the past few years, property investors have focused their attention on the growing tax burden on their rental income. This has coincided with a sustained period of low capital growth in property values, making property investment a specialist activity and taking investors’ attention away from managing their capital gains tax (CGT) exposure.

Despite that, landlords who purchased residential property in the 1990s or early 2000s are likely to be sitting on substantial unrealised gains. Although that is a positive thing, it also creates a real CGT-related dilemma.

As property values have risen and tax reliefs have become less generous, investors face a difficult question: sell and pay a potentially significant CGT liability or retain properties and continue managing assets that may no longer fit their investment objectives. In many cases, they may not even be generating a positive return due to more recent tax changes (which we have covered extensively in previous articles).

Economists often refer to the "lock-in effect", where taxpayers delay selling assets because of the tax consequences. For property investors, this can result in irrational decision-making. A landlord may continue to hold a property with modest rental returns simply because the after-tax proceeds from a sale seem less attractive than expected. In some cases, investors become reluctant to rebalance portfolios or diversify into other asset classes because doing so triggers an immediate tax charge.

The result is that capital remains tied up in assets that may no longer represent the most efficient use of investment funds. Portfolios that had been built to fund retirement are increasingly being broken up earlier than anticipated, particularly when investors become aware of the inheritance tax issues they may face if they hold assets "too long".

The challenge has been exacerbated by the gradual reduction of various tax reliefs and exemptions over recent years.

The annual CGT exemption has been significantly reduced compared with historic levels, limiting the ability of investors to dispose of assets gradually without incurring a tax charge. At the same time, reliefs that previously reduced effective tax rates have become more restricted or are available only in specific circumstances.

The issues that often delay decision-making include:

• Ongoing demand for rental property

• Belief that capital growth will return

• Uncertainty over future tax policy, interest rates and investment returns

• Emotional attachment to long-held properties

For many investors, the answer may lie in integrating CGT planning with broader estate and succession planning.

However, this is rarely a straightforward decision. Investors must balance potential inheritance tax exposure, family objectives, liquidity requirements and the practical challenges of continuing to manage property portfolios in later life.

A holistic approach is therefore essential. Although every situation is different, long-term investors often consider a range of planning strategies, including:

• Transferring interests between spouses to utilise available exemptions and rate bands

• Staggering disposals across multiple tax years

• Reviewing whether incorporation remains commercially and tax efficient

• Considering family investment structures

All this raises wider policy questions. If investors are discouraged from selling because of CGT, housing stock may remain in the hands of owners who would otherwise be willing to exit the market. The resulting reduction in transactions can affect housing supply, market liquidity and investment decisions.

As is so often the case, the best advice is to seek professional advice.

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