The buy-to-let market is likely to be hard hit by the change because when a property is sold, any gain is taxable in that tax year, with little opportunity to spread the gain over several years.
Early reports suggest the tax will be payable on all non-business assets, with some exemptions for entrepreneurs. However these exemptions are yet to be defined.
And it’s still unclear whether the government plans to reinstate the taper relief abolished under Alistair Darling, who standardised CGT to a flat rate of 18% on capital gains made above the tax-free allowance of £10,100 per year, although the National Landlords Association says it understands that the new CGT system will be banded.
The government has committed to announcing its Budget within 50 days and specific changes and timings of CGT changes are unlikely to be confirmed until then.
Chris Norris, policy manager, at the National Landlords Association said: “Rumour has it that there will be some form of banding linked to income – so landlords will pay 20%, 40% or 50% if you happen to be in a particularly high earning bracket.”
Investors selling-up
The Association of Residential Lettings Agents believes the new CGT policy could create a shortage in rental property supply as investors sell off their portfolios and could also deter future investors from entering the sector.
But Norris said to suggest there would be a glut of properties coming onto the market would be “overegging it.”
He said: “While there is no certainty about CGT as yet, we would expect some landlords to think about selling up sooner rather than later, especially if they’re close to retirement or planning to turn their portfolio and invest in a different geographical area for example.
“Doing that now is likely to make sense because rumour has it that the 18% CGT rate will increase at the Budget. But this would only make sense for some.”
The exact timing of the increase is unconfirmed, though it could come as early as Budget day. Norris said an immediate change would not be “in the interests of fairness.”
He added: “We would hope the government would allow people a few months to plan their investments properly.”
If the changes are brought in retrospectively or with immediate effect, many landlords and second-home owners may be reluctant to put properties on the market as the tax bill could more than double.
Any slowing of property coming onto the market would have an inflationary impact on house prices.
Francesca Lagerberg, head of tax at Grant Thornton said: "Traditionally such [tax] rises tend to happen from the start of a tax year, ie April 2011.”
Buy-to-let market
The Council of Mortgage Lenders was relatively positive on Thursday morning on prospects for the buy-to-let market, with director general, Michael Coogan saying: “Generally, prospects for the rental market are good.”
CML figures showed the number of buy-to-let loans declined by 15% to 22,000 in the first three months of 2010. Over the same period, the value of lending also declined, by 12% to £2.1 billion.
The CML said the decline was due to the increased number of purchases at the end of 2009 ahead of the end of the stamp duty holiday.
Coogan said: "Ignoring the effect of the stamp duty holiday, the lending figures show that the buy-to-let market has settled into a period of stable, low-volume activity.
"We want to see how the new coalition government takes forward the Treasury's initiative to encourage higher investment in the private rented sector, bearing in mind the scope for growth that exists to meet future demand from tenants.”
Bernard Clarke, communications manager at the CML said the lender trade body would find it hard to comment on the impact raised CGT would have on investment in the rental sector.
He said: “We do believe that the majority of investors in the private rented sector are attracted to it by the combination of rental income and capital gain over the longer term.”
“We would be concerned, having seen modest retrenchment in home ownership in the past few years, that we see more restrictions on the housing that is needed to meet demand in the rental sector.
“Things that would restrict this sector are the level of mortgage funding to landlords and the appetite investors have to move into the market.”
LSL Property Services, which owns lettings agents Your Move and Reeds Rains, says in the past year a typical landlord will have made just shy of £20,000 in capital appreciation and rent.
They calculate that the average landlord would have made £19,765 in the past year, £7,115 in rent and £12,650 in capital appreciation.
David Brown, commercial director at LSL Property Services, said: “In the past year, landlords saw bumper returns as house prices rocketed up from their low base. As house price growth has levelled off over the past three months, capital appreciation is no longer providing the lion’s share of a landlords’ total annual return. But investors are still seeing healthy profits, underpinned by strong rental income and improving tenant arrears.
“Capital growth is important over the long-haul, but it is rental income that allows property investors to run their businesses and pay their mortgages. Investment in buy-to-let must based upon the strong underlying fundamentals of rental income, yield and tenant demand. At present, these look very attractive.”
ARLA research suggests that rent levels are on the rise, indicating a potential market stabilisation.
The average value of a rented house was £422,700 - up from a low of £371,300 in May 2009, while the average value of a rented flat was £260,000 - again, an increase on the £234,900 seen in mid-2009.
But Ian Potter, operations manager of ARLA said this, “also highlights the dearth of available rental properties".
Impact on investment
Dominic Toller, managing director of PropertyEarth.net, said that they are seeing investor activity in the buy-to-let market slowing already.
He said: “The new government’s proposed increase in capital gains tax is also likely to further deplete these figures.”
But the NLA’s Chris Norris said the changes were unlikely to deter professional landlords from entering the market because letting properties was a long term investment.
He said: “Most of our members tell us they are in the game for between 18 and 20 years. CGT is only relevant at the point of sale.
“Most landlords are more concerned with rental income.
“We have no problem with the government trying to clamp down on speculative investors in the property market, who drive up property prices.
“This is how we interpret these changes, but we hope there will be recognition for long term investors in the buy-to-let market reflected in some form of exemption under the new CGT rules.”
Alison Beech, business relationship director at estate agent Spicerhaart, added: “Concerns remain over the proposed increases in capital gains tax for non-business assets, and we urge the government to offer some clarity on its intended policy.”
