Property investors, second home owners and buy to let landlords in the UK will be hard hit by new government proposals to increase Capital Gains Tax as experts warn that a rush of sales could distort the already fragile real estate market recovery. Investors in particular may be tempted to sell up and put their money into other assets, warns Lucian Cook, director of Savills residential research.
‘The expected changes to capital gains tax legislation will particularly impact higher income tax rate paying investors and second home owners, for whom the effective rate of tax could potentially rise from 18% to 40% or 50%,’ he explained.
‘Investors looking to rationalise or reorganise their property portfolio, particularly those who have already seen good capital growth, could avoid a hefty tax burden by disposing of their asset before April 2011. This would include those who have bought investment property as a pension pot; some of whom may now be tempted to sell and invest in other asset classes,’ he said.
‘Bringing forward sales of this type could distort some local markets at a time when the early stage recovery is already looking fragile. The higher tax liability will make property investment less tradable, which in turn may limit the flow of second homes and existing investment stock to the market after next April,’ Cook added.
He also believes that those who want to pass an investment or second home property on to the next generation may look to do so within this tax year, thus incurring capital gains tax at the existing rate rather than inheritance tax at a potentially much higher rate at a later date.
Although there is no indication that principal private residence relief will be affected, meaning that for most owner occupiers the change in CGT rates will have little or no effect, some owners who have occupied their property for only part of their period of ownership face an increased tax bill when they come to sell.
‘Properties ancillary to a main residence, such as lodge cottages, staff flats, and development plots in the garden will all be under close scrutiny. Owners will be keener than ever to ensure that it meets the requirements to be treated as part of the main house,’ said Cook.
The British Property Federation is calling for target rollover relief from this doubling of the tax and also for the formation of residential real estate investment trusts (Reits), which were introduced for commercial property in 2007.
‘Buy to let landlords and individual investors will bear the brunt of this 22% tax rise and while the public at large may have little sympathy with those profiting from property sales, ministers must recognise the massive contribution that these people have made to housing supply over the last decade. Over a million more people rent now than in 2001 and this has been made possible through buy to let investment.,’ said BPF chief executive Liz Peace.
‘The government must to look to nurture new investment streams into housing – through residential Reits and from the institutions. This will mean reforming tax rules, incentivising large-scale investment from institutions and changing the Reit structure to allow housing vehicles to form. Ministers should also look to introduce a targeted rollover relief from these changes for investors who keep their money in housing,’ she added.
