Tax Cloud Looms Over UK Property Market
Friday, June 04, 2010

The prospect of a hefty increase in the rate of capital gains tax in the forthcoming emergency budget is hanging like a dark cloud over the UK property market, with many long-term investors set to sell up in order to avoid the prospect of having to hand over a large slice of their gains to the Treasury.

Speculation has been growing over the impact of the proposed CGT increase, although the government has yet to reveal its intentions and probably will not do so in detail until the June 22 interim budget, unless, of course, the Whitehall leak machine swings into action.

According to the Conservative/Liberal Democrat coalition agreement, the government will seek to realign CGT, currently at a flat rate of 18%, with income tax rates, meaning that some taxpayers may face CGT bills of 40%, or even 50% if the tax is aligned with the new top tier of income tax. While the coalition has promised "generous" exemptions for business-related earnings in order not to been seen as a 'business-bashing' government, it remains to be seen how the CGT reforms will affect property owners. However, with about 1 million buy-to-let investors in the UK, Nationwide, Britain's largest building society, has suggested that downward pressure on prices could be inevitable if investors sell off their property holdings before any tax hike kicks in.

“If there is a significant time lag between the announcement of the increase and its actual implementation, then some second home owners and buy-to-let landlords may decide to sell in advance of the higher rate being introduced," Martin Gahbauer, Nationwide’s chief economist, was quoted as observing by the Daily Telegraph.

“Such a development could lead the supply-demand balance to shift more in favour of buyers and relieve the current upward pressure on house prices," he added.

While it is difficult to predict how far house prices may drop, those who have held property for the longest, and therefore have the largest unrealized gains, stand to lose out the most, especially if the government refuses to give in to pressure to introduce some form of taper relief, a measure that would reduce an investor's CGT liability depending on how long an asset has been held.

A recent survey by LSL Property Services plc, owner of the UK's largest lettings agent network, warned that one-quarter of the UK's real estate investors will quit the market if they are not afforded some sort of relief from the CGT rise. According to the survey, nine out of ten landlords oppose the new proposals, while 71% of landlords said that they would be reconsidering future investments in property. 26% of respondents said that it if the proposals were introduced, they would leave the sector before the new tax is introduced.

The UK property market has enjoyed something of a 'mini boom' in the past year, and average house prices are now just 9.5% below the peak reached in October 2007, according to Nationwide. Gahbauer  suggests that the current supply-demand balance on the market "is still consistent with relatively stable to modestly upward trending prices." But with the economic outlook far from certain, other experts believe that price growth will fade in the remainder of the year.

“The recovery in UK house prices, which started during late-2009 with great momentum, surprised the market," notes James Thomas, Head of Residential Investment and Development at Jones Lang LaSalle. "However, this recovery is now at risk as the political environment remains in a state of flux. The impact of structural changes to the national economy, aimed at curbing the national debt, has left buyers and sellers unsure of the right time to act."

"London and the South are likely to fare better and outperform the wider UK market as a result of global investment capitalizing on the continued weakness of sterling but the new government’s emergency budget in June will have a significant bearing on existing stability," Thomas adds.