New Capital Gains Tax threatens housing recovery

The proposed tax increases are likely to have an even bigger effect on future investment in the private rental sector.  71% of landlords surveyed state that an increase in Capital Gains Tax will make them reconsider future investment in property.

Although the profitability of property investment is determined by a combination of rental income and capital gains, landlords appear to place greater importance on capital gains. While 30% of landlords give equal importance to rent and capital appreciation, 36% of respondents consider capital gains the most important aspect of property investment.  Of these, a quarter state that they only consider capital gains when judging an investment.

Simon Embley, CEO of LSL Property Services said: “Over the past two years, investment properties have accounted for 30% of sales across our network – over 40,000 transactions. Foisting a tax-hike on property investors will drive many from the housing market – at a time when its recovery is still perilously fragile. If potential landlords are discouraged from investing, we will see a large proportion of the demand for house purchase disappear, and house prices may fall. A further fall in house prices will see more home-owners in negative equity potentially triggering a significant rise in repossessions as owners lose confidence in the market” 

Under the new tax proposals, long-term investors will suffer the most.  For instance, in the last twenty years, the average house price has risen from £44,880 to £168,202.  This means that an investor who bought in 1988 and wanted to sell would be liable for tax on 40% of £113,222 .  As a result, an investor who bought twenty years ago as part of a retirement strategy will face a tax bill of £45,288.

Of the landlords still committed to the private rental sector, 41% are unable to sell property before the tax is introduced because their property portfolio represents their retirement plan.

Embley continues: “If Capital Gains Tax is to be overhauled, we need to see the reintroduction of taper relief.  As it stands, the new tax regime will rein-in future investment – not to mention hammer investors who have already bought second homes for a retirement nest egg. Prudent property investment is a long-term venture, and the new government needs to take this into account, not penalise it.”

Taper relief was originally introduced in 1998 before being replaced by the Entrepreneurs Relief in April 2008.  It exempted a percentage of an investor’s capital gain depending on how long the asset was held. For example, a property sold after three years would qualify for the minimum of 5% taper relief, whereas a property held for ten years would qualify for the maximum of 40% taper relief.

Embley concludes: “The private rental sector is vital to housing the UK’s growing population.  There is a chronic shortage of residential housing available – and this is going to get worse.  Social housing will not cover the shortfall.  The government needs to encourage the growth and professionalization of the sector – not deter it.

“This potential new tax regime will discourage institutional investors as much as it will private landlords from entering the market. We would like to see the government encouraging investment from trusts and property funds by abolishing stamp duty for property investment vehicles like REITS, and waiving the 2% fee these trusts face when entering the market.”    

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One thought on “New Capital Gains Tax threatens housing recovery

  1. Major Landlord

    I largely agree with Mr. Embley. The recent cut to 18% CGT was uncalled for and utterly insane, but a hike to 40% would be equally foolish. The previous taper relief system was fairer and did do something to discourage the odious property speculators who have caused hyper inflation in property prices, while adding nothing useful back into the market.

    If this government truly recognises the role of the PRS in providing a significant proportion of UK rental stock, then it’s time their tax rules treated residential property investment as a legitimate long-term business rather than just an alternative to playing the stock market. They should consider:

    – restoring a taper relief system, but perhaps with no relief inside 5 years, and full relief after 10 years
    – no CGT payable where gains on disposal are re-invested in new property or improvements in their portfolio within 12 months. This would enable landlords to trade up, improve properties or move areas without a financial penalty.
    – they should also consider allowing all earnings (whether trading profit or capital gains) to be offset against all costs. At present, you can make a trading loss and carry a tax loss forward, but cannot offset that against any capital gains tax liability on disposal. This is grossly unfair.

    Owning property for rent is a serious business, and should be treated just like any other business. If the government decides to take 40% of every property gain, rather than allowing the gain to be re-invested, they will extract working capital from the PRS, cause many investors to leave the PRS, and will thus cause a critical shortage of rental stock.

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