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The Chancellor’s draft legislation to reform capital gains tax announced at the end of last month has been welcome news for property investors. The decision to drop the tax to a flat rate of 18 per cent will release many property investors from the tax trap.

Historically, investors have held onto properties for much longer than originally inten-ded to avoid losing huge profits when the asset was sold. But from April 6, 2008, they will be able to base their decision to sell on purely an investment strategy rather than being constrained by the financial implications.

This tax rate will make property investment one of the most tax-efficient investment vehicles in the UK as an investor will not only benefit from the reduced tax of 18 per cent compared with the standard income tax charge of 21 per cent when selling the property but can capitalise on an annual allowance per person of 9,200 exempt from any tax deduction. This is particularly favourable for couples investing together.

In addition, they can offset any home improvements against the CGT liability.

However, it is not only the financial benefit that will be realised. One of the main advantages to the change in CGT is the impact it will have on investors’ approach to building their portfolios. The lower tax rate will enable property investors to take a more flexible approach to developing their portfolios and will impact on how property investors operate their investment strategies, including exit strategies.

Investors will have the improved flexib-ility to change track and adjust their portfolios to suit their changing personal requirements. For example, mature investors with large portfolios commonly want to move into commercial property, which often requires less direct involvement in the asset. However, investors have previously had to weigh up the benefits of this decision with the tax implications of selling off their residential portfolio. Consequently, many investors have had to stay with their asset despite it not reflecting their current requirement.

Of course, this legislation will only take affect if an investor’s strategy involves selling the asset. If they are buying properties solely to benefit from the rental income, then this new CGT rate will have no impact. But irrespective of how investors originally intended to approach their investment, personal situations change and investors may find the lower capital gains tax much more favourable than they had originally envisaged.

Although this new rate of tax has been welcomed by property investors and second home owners, it has been suggested that by lowering this tax, the Chancellor is encouraging buy-to-let investors and effectively push-ing other buyers and particularly first-time buyers out.

Yet, why should investors who are risking their money in the property market and providing much need rented accommodation pay out huge amounts in tax, when owner occupiers are not paying anything towards CGT? Britain is meant to be an environment which favours entrepreneurial spirit and yet huge tax bills are hampering this. The new 18 per cent rate is much more workable and puts the UK more in line with other European countries. The Chancellor might even see his CGT funds increasing as this lower rate makes it more palatable for investors to sell properties and therefore pay the tax more regularly.

By increasing the liquidity in the buy-to-let market, we may see an increase in the supply of property coming onto the mar-ket, which can only be good news for first-time buyers.

At the moment, everyone is focusing on the credit crunch but property investment is still attractive to investors. With the introduction of the new tax legislation, we are going to see the number of property investors and second home owners increasing as many potential buyers acknowledge the benefits of the improved liquidity and the lower tax threshold.

It will be interesting to see how this significant change in the tax rate impacts on the property investment market, which areas in the UK will particularly benefit and whether investors’ strategies adjust.

However, one thing is certain. This change in legislation will help to relight interest in the buy-to-let market, which in turn will help support property prices and general activity in the housing market. Ultimately, this is good news for the whole market.

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