A Tory manifesto proposal to gift tax breaks to property investors could cost millions in lost taxes as savvy landlords exploit a potential avoidance loophole.

Tax experts claim the proposed General Election 2024 giveaway of a two-year capital gains tax (CGT) holiday for landlords selling rented homes to sitting tenants won’t work.

The plan is to free up housing stock to homeowners rather than investors by offering the CGT holiday to property investors selling to a sitting tenant.

The manifesto pledge already includes an anti-avoidance warning that the tax break is only available if the tenant buying the home rented the property on or before June 10.

The proviso aims to stop landlords from bringing in tenants they know can afford to buy just before they sell a home so they can avoid paying CGT on the deal.

A drop in the ocean

The policy would likely cost the Treasury £20 million a year, with buy-to-let landlords pocketing an average of £21,000 a sale.

The offer would likely affect few tenants—the Tories are expecting around 900 a year to take up the deal, a drop in the ocean of additional home sales that raised £1.7 billion in CGT during 2022-23, according to HMRC. The private rented sector houses around 5.2 million tenants.

Graham Boar - a partner at accountants UHY Hacker Young- is among those claiming the policy could be a potential disaster.

“The proposed CGT relief for landlords selling properties to tenants is ripe for abuse unless the law is drafted carefully. There’s a risk that landlords selling properties will structure them as tenancies, leading to sales avoiding huge amounts of tax,” he said.

“A landlord could also sell a property ‘on credit’ to a tenant, who could then sell it on with no gain and pay back their debt to the landlord. Either way, HMRC would miss out on vast amounts of tax.

“Drafting the law in a way that avoids the risk of tax avoidance is likely to make it complex and difficult for taxpayers to understand.”

Rent reforms resurrected

Elsewhere in their manifesto, the Tories have reaffirmed their intention to scrap Section 21 no-fault evictions by reintroducing the shelved Renters (Reform) Bill while doubling down on a promise from former Levelling Up and Housing Secretary Michael Gove to deliver court reforms to make evictions cheaper and more accessible.

Prime Minister Rishi Sunak will also resurrect his party’s promise to cap ground rents paid by leaseholders at £250 a year.

The Lib Dems and Greens, as has Keir Starmer's Labour Party, have included introducing their versions of the Renters (Reform) Bill should they win power.

However, the Greens go further by aligning CGT rates with income tax rates in their first budget.