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Capital pain

Mortgage sector fears a planned rise in capital gains tax will have a knock-on effect as landlords rush to sell ahead of the deadline. Paul Thomas reports

The mortgage industry has expressed fears the coalition Government’s expected move to double the rate of capital gains tax could spell trouble for the housing market.

It is predicted that the first Budget of the new Conservative and Liberal Democrat Government will raise capital gains tax to 40 per cent from its current level of 18 per cent, which was brought in by former Chancellor Alistair Darling in 2008.

Savills Private Finance director Melanie Bien labels the proposals a “disaster” and says if landlords are unfairly targeted and not extended the same exemptions as other businesses, it could impact the housing sector.

She says: “They are saying it is a rise on non-business assets. But many landlords run their buy-to-lets as a business and I think the exception should be extended to them as well. There is a danger there will be a rush to sell to beat the deadline and that will have a knock-on effect on the market.”

Bien believes the CGT rise is simply a way of balancing the books to fund other tax reliefs and is making compromises within the two-party coalition.

She says: “They are trying to make concessions for each other and they want to pay for this rise in the £10,000 bracket in income tax and national insurance cuts. They have to get the money from somewhere and I think landlords have been unfairly targeted.”

Mortgages for Business managing director David Whittaker believes buy-to-let landlords should not be punished by the tax system.

He says: “Even the Labour Government was prepared to recognise the need to incentivise people to risk their money to build businesses and I think that still needs to be separately identified.

“I would be most disappointed if it was just treated as income paid at the highest marginal rate in the year in which it arises. It is simplistic, naive and unfair treatment for those people prepared to put their money at risk to create wealth for the benefit of themselves and others.”

The National Landlords Association says the move appears to be a backward step.

NLA policy manager Chris Norris says: “The worrying long-term problem is that this is the second major capital gains tax reform in less than three years. We saw from the pre-Budget report in 2007 changes that we welcomed – the reduction from 40 per cent with all of the various fairly complex reliefs and exemptions down to an 18 per cent rate.

“Now it looks like we are reverting to something akin to the old system, although we do not know exactly what the reliefs and exemptions will be. “

Norris says most of the NLA’s members tend to plan their investments over the long term, meaning frequent changes to the CGT system create uncertainty. He says this could be resolved by recognising buyto-let landlords as businesses.

He says: “When we question our members, they say that most of their business plans are based around 17 or 18 years. And it is very difficult to plan for the medium to long term if you cannot rely on the tax system because HMRC refuses to recognise residential property as a business capital investment and they keep changing the regime.”

If I Were You director Rob Clifford says: “There is a real possibility that a CGT rise such as this could lead to a rush by landlords to crystalise property gains ahead of the change, leading to too many properties coming onto the market at a time when house prices are vulnerable.

“The reality is that the vast majority of amateur landlords achieve a very slim net rental yield, such that the capital gain is a key motivation.

“Therefore, the tax treatment is hugely significant to their motivation and decisions.”


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