Will rising CGT undermine landlords?
by Morag Lyall
An increase in capital gains tax (CGT) could undermine landlords and act as a significant disincentive for those considering further investment, critics have said.
Earlier this month the new Conservative/Liberal Democrat government released a coalition agreement stating that it would raise CGT for non-business assets at rates similar or close to those applied to income, with "generous exemptions" for entrepreneurial business activities.
Yesterday (May 25th) at the state opening of parliament the Queen confirmed that tax will be "made fairer and simpler", while the Treasury annoucned that it would rise to a rate "closer to those applied to income tax".
This rise is likely to be put at 40 per cent, although chancellor George Osborne will officially announce the details during the emergency Budget on June 22nd.
Currently, investors pay 18 per cent in CGT, which is a tax on assets that are sold, given away or exchanged.
At the time of the announcement the National Landlords Association spoke out, saying that people who invest in buy-to-let properties should be one of the "generous exemptions" to the price hike, as the new government should be focused on encouraging investment in residential property.
Alan Ward, chairman of the Residential Landlords Association, supported this view.
He suggested that CGT increases should exclude landlords retiring from the industry "as they are often long-term investors with major capital gains after many years of business development".
"Any increase in CGT risks undermining the current slow restoration of confidence in private rented sector investment," he added.
However, campaign group PricedOut claimed that buy-to-let investors should not be exempt.
Katy John, spokesperson for the organisation said: "For reasons of fairness and restoring stability to the UK housing market, any planned rise in capital gains tax must include buy-to-let investors."
She suggested that landlords had contributed to the "displacement" of first-time buyers from the housing market.
Ahead of the increase, the property market could witness a rise in the number of properties on the market from landlords and investors to avoid the sting of the tax.
Ronnie Ludwig, partner at chartered accountants Saffery Champness, told The Guardian
: "In advance of these changes being formalised we are likely to see people scramble to take gains, prompting a rush of sales of second homes and share portfolios."
As for people with holiday homes
, they too are expected to be affected by the rise, as their properties come under the term "non-business assets".
People who have a holiday home could look at DIY house selling
before the tax is introduced unless they plan to invest for a long time into the future.
It is not yet clear whether or not Mr Osborne will introduce the tax rise immediately after the Budget has been announced or if it will come into force in the next tax year, which would give homeowners longer to examine their portfolio, finances and investment opportunities.
In an article in The Telegraph
, it noted that indexation will become another issue for investors.
Fund manager Fidelity told the newspaper: "Our analysis shows that if CGT were raised in line with the marginal income tax rate without introducing an inflation-based indexation allowance, it would more than double the tax bill for thousands of investors."
The company stated that when the Labour party raised CGT from ten per cent to 18 per cent, investors did not really notice the loss of indexation as "a low inflation environment and lower tax rate helped to offset the impact".
However, it has been suggested that with a rise this large, the government must reintroduce the indexation allowance in order to keep the buy-to-let market going.
Published on: May 26, 2010
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