Increase in Capital Gains Tax

23/08/2010

An increase in Capital Gains Tax and the Property Market

The new coalition government made it clear that it planned to raise Capital Gains Tax (CGT) on Non-Business Assets from its current rate of 18%.  The budget on 22nd June indeed confirmed an increase in CGT however the increase was lower than many expected from 18% to 28% for higher rate tax payers.

So how if at all will the changes impact the housing market?

CGT on gains made from the sale of residential properties will apply where a property does not benefit from Private Residence Relief. It is most likely therefore to effect buy-to-let investors.

Over the past three years it could be argued that investment buyers have helped replace deposit strapped first time buyers, especially as research shows that many investment buyers .purchase property under the £150,000.00 price bracket, therefore helping to support at least some movement in the market.

If investors are an integral part of the general market then their reaction to CGT increases will be crucial to the general state of the property market.

Several tactics appear to have been used by the coalition government to mitigate the effect that the increase in CGT could have.

Firstly the implementation of the tax rise took effect immediately avoiding a sudden rush of properties coming onto the market thus helping to maintain a steady supply and demand and allowing prices to remain stable.

Secondly by leaving a gap between the higher rate of CGT and the rate of income tax for higher rate tax payers it can be argued that there is still an incentive for investors to convert income into capital gains and reduce their overall tax liability.

While these strategies may go some way to reducing the impact of the increase in CGT some groups such as The British Property Federation feel that the changes do not go far enough and have called for changes such as the introduction of rollover relief to be extended to buy-to-let properties by making them qualifying assets. Their argument is that many investors will now be penalised by increased CGT on sale and stamp duty on subsequent purchases and that this may act as disincentive for many investors.

It is difficult to predict the effect an increase in CGT will have on investor’s behavior. On the face of it the implication for many investors may not seem too great however the changes must be considered in the context of other difficulties facing this sector. Over the past three years there has been a decrease  in the number of buy-to-let mortgage products available and in addition where lenders were previously lending up to 85% of a property’s value in many cases they are lending only 70% or less. Perhaps these factors combined may deter possible investment in the property market.

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