CGT hike could'devastate entire housing market'

News Category: Industry News

Proposals to hike Capital Gains Tax could devastate both the house sales market and the private rented sector, a leading figure has warned. He said rental supply would fall and the number of purchasers would collapse.

Meanwhile, auctioneers are anticipating a flurry of instructions as investors rush to beat the rise.

Simon Embley, chief executive of LSL, was outspoken in warning  that foisting a CGT hike on investors would have a severe impact.

According to a new survey by his firm, it would force more than a quarter of property investors to leave the rental market, while nearly three-quarters might not invest in property again.

The group, which owns Your Move and Reeds Rains, found that 26% of landlords will consider selling up before the higher rate is introduced. Nine out of ten oppose plans to raise the level, and 71% said that an increase in CGT 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 surveyed place greater importance on capital growth.

While 30% of landlords give equal importance to rent and capital appreciation, 36% of respondents consider capital gains more important aspect. A quarter state that they only consider the likelihood of capital gains when judging an investment.

Simon Embley, CEO of LSL, 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 most unless the Government reintroduces taper relief – which was abolished by the Labour Government.

For example, in the last 20 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 20 years ago as part of a retirement strategy would 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 suggested: “If CGT 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 concluded: “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 professionalism of the sector – not deter it.”

Yesterday, Auction House – which operates nationally – advised landlords and people with second homes or buy-to-let properties to put them into an early auction, rather than risk them on the open market.

Director Roger Lake told owners they would be able to save themselves a small fortune. He said: “Putting such properties into an auction means owners can beat the rises before they strike, rather than risk letting them linger on the market under the uncertainties of private treaty.

“The beauty of the auction route is that it gives a seller control over the date when their property exchanges – whereas with private treaty, the seller is in the hands of the buyer, the buyer’s solicitor, and very often a chain of transactions that make the exchange date almost impossible to predict.

“In short, selling a property by auction is the best way to ensure that sellers can schedule their sale to avoid the CGT rises when they take effect.”


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