Press Article
BUY ASSOCIATION - June 2010
Capital Gains Tax
By Jo Eccles
We’ve recently seen a gradual increase in the supply of new property coming onto the market. The government’s proposal to increase Capital Gains Tax (CGT) for non-business assets from a flat rate of 18% to 40% is likely to further encourage more supply of property in the short term, especially in the mainstream market.
There are approximately one million buy-to-let properties in the UK and approximately 250,000 families who own second homes, so an increase in CGT is likely to have a widespread effect. We may see a period of panic selling over the next few weeks as people seek to quickly dispose of second homes and investment property before the Budget is announced on 22nd June. If you’re able to secure a quick sale to a cash buyer and realise any capital gains before the proposed changes, then now could be a good time to sell. Otherwise, my advice would be to hold on to your property as planned, as any tax changes are likely to be put in place with immediate effect once announced, so avoiding the increase is likely to be difficult.
Any increase in supply is a welcome change for buyers who have been facing high competition and a climate of sealed bids and demanding vendors. We expect the increased property supply to suppress price growth over the short term, which has largely been fuelled over the past 12 months by a lack of supply, holding prices firm at near-peak values.
Over the long term, it remains to be seen whether the proposed change in CGT - assuming it is introduced as planned – will have a wider impact on the UK property market as a whole. There are concerns that it may reduce the appeal of buying UK property for investment purposes and we may see would-be buyers turning to alternative assets instead.
Taxation is especially crucial in the Prime London market as purchases at this level are typically funded by cash, rather than borrowing. Therefore, recent tax policies such as the bonus tax, the 50% income tax on higher rate earners and the announced higher stamp duty on properties over £1m may dampen demand. There is, however, a sigh of relief that the Lib Dem’s proposed Mansion Tax has been ruled out.
On a positive note for overseas buyers, Sterling remains low which will continue to make UK property look cheaper to such buyers, who have played an active role in the London property market. This has been evident in our own client mix over the past 12 months, with a large proportion of the clients we’ve represented having been overseas buyers based in Australia, Dubai and across Europe. They have typically engaged our services to assist them purchasing either a buy-to-let investment or a London base, with budgets ranging from £400,000 - £1.5m. Generally, their motivating decision to buy has been driven by the favourable exchange rate, therefore we anticipate a continued demand from overseas buyers over the next 12 months.