Investors Sell Ahead Of Possible UK Tax Hike
Thursday, February 25, 2010

Property consultants have reported a significant rise in the number of second home-owners and long term investors in central London putting their properties up for sale as speculation grows that the government will increase the capital gains tax rate in the 2010 budget, due to be announced in the coming weeks.

The current flat rate of 18% was introduced in 2008, replacing the variable rate linked to income tax rates and taper relief. However, the tax was not mentioned in the April 2009 Budget or in December’s pre-Budget report, despite the fact that changes were announced on most other taxes.

James Hyman, partner for residential sales at property consultants Cluttons, said: "The budget will be more important for the property market than the election. Many are concerned about a possible rise in CGT – particularly investors and those with second homes in the form of city pieds-a-terre who are looking to sell. While stock in the Capital remains historically low, we have noticed a trend that the properties that are coming to the market are from investors wary of a possible capital gains tax hike and cashing in on the current high prices being achieved.

Cluttons suggests that other tax measures announced recently by the government will greatly reduce the spending power of London's well-remunerated professionals and entrepreneurs. These measures include the 50% tax rate on income above GBP150,000 per year, to be introduced from April, the loss of personal tax allowances for those earning more than GBP100,000 per year and the 50% payroll tax on bank bonuses of more than GBP25,000 paid to staff this year.

“The previously announced changes to income tax bands and banks bonuses will already have severe repercussions for the Central London property market as liquidity is greatly reduced. A hike in CGT on top of this could have a serious impact on property values," Hyman observed.

In its budget submission to the government, the British Venture Capital Association (BVCA) also attempts to make the government think twice before raising the CGT rate, noting that the government's constant tinkering with the tax regime down the years is contributing to instability, uncertainty and a general lack of confidence in the UK tax system.

"In order to ensure the UK preserves and reinforces its position as the centre for European private equity, venture capital and entrepreneurship, the UK tax system should: be stable; give certainty to taxpayers; offer simplicity wherever possible; and have competitive tax rates which encourage highly skilled people and businesses to locate and invest in the UK. In recent years the UK has not performed well on these measures," the BVCA stated in a covering letter to Chancellor Alistair Darling.

"In particular we are concerned that the incoming top rate of income tax would be compounded by further increases in the rate of Capital Gains Tax. This would be deeply damaging to the UK," the letter continues. "The relatively low and stable rate we have had in the UK has been successful both at encouraging enterprise and raising revenue. An increase in the rate would, we believe, lead to lower tax revenues as transactions would be put on hold, and it would send a very negative message internationally about the UK as a place in which to base and grow a business."

Despite the growing discontent among investors at the UK's tax regime, Cluttons predicts that London's property prices are expected rise sharply, by up to 6%, by the end of this year, with a further 4% increase during 2011. This contrasts sharply with a mere 1% growth forecast for the rest of the UK.

The Cluttons house price report, published earlier this month, also predicts that rents are set to increase by 7% over the next two years, benefiting buy-to-let investors. Cluttons believes this can be attributed to a number of factors, including increased City confidence and landlords becoming more assertive in rental negotiations, due to rising interest rates.

“We believe firmly that prices are set to continue their ascent in London over the next two years," commented Andrew Stanford, head of Cluttons’ residential professional division. "One of the key reasons is an acute shortage of good housing stock on the market and the influx of overseas buyers who are still continuing to snap up properties and consequently push up prices in the capital."