“The suggestion that capital gains tax could be as high as 50 per cent
next April could hinder many buy-to-let investors who are looking to leave
the market, as well as those looking to make their move into it and who plan
to sell in the short term. This problem is likely to be compounded later
this year as interest rates begin to creep up,” says Dominic Toller,
managing director of PropertyEarth.net.
A surge in property sale instructions could cause UK house prices to fall,
offering more opportunities to other homebuyers and new investors who can
take advantage of existing landlords with several properties on their books
looking for a quick sale. These investors face a hefty increase in their tax
bill once the increase kicks in, and they may well decide to sell and be
taxed for any gain at the current CGT level. This decision will be based
largely on how they think the property market will fare as a whole.
“For somebody who has owned property for some time, say, 10 years, they
will have a big built-in gain. So if they don’t think it will continue
climbing, it’s going to be a good idea to sell and trigger that gain at a
lower tax rate,” says Bill Dodwell, head of tax policy at Deloitte.
However, Andrew Fallows from estate agents Carter Jonas says investors with a
large portfolio are boxed into a corner if they want to sell up before the
CGT changes take effect and will struggle to get full value for their
properties.
“They have to decide whether accepting a discount will be mitigated by
the tax saving,” says Mr Fallows.
It’s also important to remember that investors faced a CGT rate of 40 per cent
just a few years ago, before the flat rate of 18 per cent was introduced, so
many people will have made their original investments on the basis of a
higher tax rate. Experts argue that the reaction from investors will depend
largely on the detail behind the new proposed rates and, in particular,
whether investors profits will be protected against inflation.
“The old rules dealt with inflation by taper relief, and before that
again there was indexation. When Vince Cable put this together he did
include indexation relief, so it seems likely to me that they will continue
to do so,” says Mr Dodwell.
And for those choosing to stick with their buy-to-let properties or thinking
about entering the market for the first time, there are signs of renewed
optimism. Take mortgages, for instance: higher loan-to-value (LTV) deals are
now more available and lenders are returning to the market.
“There were just four deals available in September 2009 at 80 per cent,
all of which were fixed deals from Clydesdale/Yorkshire Bank. Today there
are 13 deals available at 80 per cent, with Shepshed Building Society and
the Mortgage Works moving back into offering these deals,” says
Michelle Slade from financial information site Moneyfacts.
Many landlords have struggled in the past few years with lenders tightening
lending and insisting on huge deposits in the wake of the credit crunch.
Buy-to-let mortgage products all but disappeared during the credit crunch;
at its peak in August 2007 there were more than 3,662 available. But today
that figure stands at just 304 according to Moneyfacts. However, there are
encouraging signs that the buy-to-let market is taking an upward turn.
Firstly, Paragon, which put a freeze on new lending back in 2008, is expected
to make a return to the market and begin lending again soon after reporting
a surge in profits. Also, this week the Mortgage Works, part of Nationwide,
launched a range of deals requiring a deposit of 20 per cent, including a
one-year fixed rate at 4.69 per cent, albeit with a hefty arrangement fee of
2.5 per cent.
“The move by the Mortgage Works is significant in stretching the market
out back up to 80 per cent LTV. This is good news to see a lender making a
clear statement of intent to continue to be a big player in the sector.
Aldermore Bank is also expected to launch into buy-to-let lending imminently,”
says David Hollingworth from broker London & Country.
Landlords themselves are also feeling more positive about the outlook for
their lettings business. The new Landlords’ Optimism Index from the NLA
shows that 57 per cent of landlords rate their overall prospects over the
next three years as good or very good ? the highest level since 2007.
This renewed buoyancy is partly down to an increase in tenant demand and
rising property prices, but it remains to be seen whether the plans for CGT
will dampen spirits. One possible outcome is that there will be a sharp
increase in the amount of the properties on to the market.
“The rental market is already suffering from a severe shortage of new
rental stock at the moment. Increasing the CGT rate will not only persuade
many experienced landlords to sell up in the next six months, but it will
also discourage new landlords from entering the rental market,” says
Matt Hutchinson, director of flat- and house-share website Spareroom.co.uk.
With uncertainty over house prices and interest rates, many investors may
decide to keep a hold on their investments and let their tenants cover their
mortgage payments. Buy-to-let landlords are usually prepared to be in the
market for long term gains, not profits from a quick turnaround, so an
exodus of professional landlords is unlikely, regardless of how CGT rates
fare.
“I expect that many landlords will continue to take a long-term view on
their buy-to-let portfolio that will also continue to generate income in the
meantime,” says Mr Hollingworth.
Expert View
Andrew Fallows, Carter Jonas, Estate Agent
“I don’t see that there will be a great rush of investors selling their
properties but it all depends on the circumstances of the individual.
Someone with one or a couple of investment properties is going to continue
to hold those because the taxable gain becomes quite small when you take
into account personal CGT allowances. However, for investors with a large
portfolio, allowances won’t have such a beneficial impact, and with
potentially a very short time to move a portfolio, it’s going to be very
difficult to get full value for their properties.”
View full article here
Popularity: unranked
