Buy-to-let investors face a sharp hike in capital gains tax under the new coalition government’s emergency budget. Will there be fire sales? asks Estelle Maxwell
For Anthony Lock, a buy-to-let property investor with high-value stock in London, it could be time to cash in his chips.
Lock, who acquired his first property as a student in the West Country 30 years ago and now holds 10 investments, has been spooked by last week’s pledge by the new Lib-Con government to raise non-business capital gains tax to levels matching that of income tax.
Although the details and timing have still to be fleshed out by the coalition, the prospect for Lock is worrying. Rather than paying 18% tax on his profits, as a higher-rate tax payer, he would face a 40% charge – possibly from next April (see below). For Lock, this means either selling up now – possibly taking a hit on the value of his investments – or potentially paying an inflated tax bill if he sells later.
“I am thinking of selling some stock now,” he says. “If the forthcoming increase is not accompanied by some sort of taper relief, we are talking about a difference of hundreds of thousands of pounds.”
And Lock is far from alone. Thousands of buy-to-let landlords look set to see millions wiped from the value of their investments as the government seeks funds to plug the gaping hole in UK finances. Within hours of the publication of the government’s coalition agreement last Thursday, agents were speculating that a wave of “fire sales” could hit auction houses in the next 10 months as a flood of investors, many of whom have acquired bricks and mortar as an alternative to traditional pension plans, liquidate stock.
Auction house Allsop says it has already received calls from investors looking to sell.
And auctioneer Chris McHugh of McHugh & Co says: “Most investors think that the changes will come into effect in April next year. However, the fear is that they could be introduced soon after an emergency budget in 50 days’ time. We are being asked if it’s too late to get stock into the June sales to beat that deadline – people don’t want to wait until July. We have had to turn down stock in the past few days because we’re not doing a June sale.”
Professional investor Arv Soar, who owns more than 200 properties in Hull, is also worried: “I’m releasing a lot of my personal stock now, before this tax change comes in. We have to make such a big margin when we sell and, under these plans, it is not worth selling. If we lose 40% of what we make on such tight trading margins, people will hold on to stock rather than sell, as there is no point in putting money into the bank.”
Laurence Freillich, director at Finchley-based Moreland Property Group, which owns around 7,000 properties, of which 70% are residential, agrees. “This will completely destabilise the market,” he says. “It will hurt the semi-professional investor who bought in the early 1990s and will be retiring in the next 10 years or so. You have to ask what point there is in taking the risk and buying investment stock if you have to give 40% or more away to the taxman. Anything we want to sell we will sell now before this scheme kicks in. There will be a flood in the market, which will reduce values of certain properties and not assist with lending.
“There won’t be any ‘short-deals’, with people refurbishing and selling on.”
Describing the government’s proposals as “drastic”, the National Landlords Association has pledged to do all it can to “ensure landlords’ activity is considered to be business activity for the purpose of CGT”.
The NLA says the reintroduction of tax rules abandoned by the Labour government in 2007 will fail to distinguish between property traders and long-term investors.
“We expect the link between income tax and capital gains tax to be reintroduced, possibly resulting in three bands – 20%, 40% and 50%,” says Chris Norris, NLA policy manager. “We are concerned there will be no recog-nition that landlords are not speculators and invest in residential housing as a long-term business.”
Taking a £50,000 property bought in 1985 now worth £245,309, according to the Nationwide Property Index, it is easy to see how long-term investors would find the potential tax hike hard to swallow. Under the current system, CGT would be charged at 18%, including £10,000 tax free, realising £34,155 on a £245,309 property. But this figure would rise to £88,124 if the new proposals are implemented.
Moreover, if LibDem proposals to cut the annual amount of tax-free capital gains from its current £10,000 threshold to just £2,000 are adopted – quadrupling at a stroke the number of people caught in the CGT net – the tax owed on gains from our typical £245,309 home would rise by another £8,000.
However, despite the scare stories, some investors are less concerned by the proposals.
Chartered accountant and investor Nigel Springer, of Grand Central Properties, has traded in property for 20 years. Springer says he had expected CGT to rise “sooner or later”. Will he be selling? “It may be better to just keep the property and its income,” he says. Springer points out that many investors hold property through corporate vehicles or offshore investment vehicles and are, therefore, liable to pay corporation tax rather than capital gains tax on their investments, so will be unaffected by the proposed changes.
“The changes will not affect my decision to trade because we work under the remit of corporation tax, which is likely to stay at the same level,” says Springer. “If you face a potential loss on properties then the temp-tation must be to sell them now. But there is no point, when you are faced with a 1% return in the bank against 8-10% in rental income, unless you need the money.”
Doncaster landlord Kim Stones, owner of 76 homes, agrees: “I don’t believe there will be thousands of landlords trying to dump their properties, though there will be some. We will sell some stock, but we are also still looking to buy for the long term. We look for rental income, so we might as well hold high-yielding properties.”
But, for landlords like Freillich, Lock and Soar, it’s decision time now. With an emergency budget set for 22 June to start tackling the UK’s deficit, they and many others will be hoping that opposition to the CGT proposals led by former Cabinet minister John Redwood will have some impact.
CGT: the facts
Pre-2007: Captial gains tax rates were set in line with income tax. with leview of 10%, 20% and 40% depending on income. These rates were applied to any relevant capital gains after deduction of allowable losses, annual exemptions and taper relief.
2007 changes: The 2007 budget introduced a flat 18% rate of CGT. Taper relief was abolished.
Expected changes 2010/11: These are likely to include restoration of the income link, possibly resulting in three tax bands of 20%, 40% and 50%. Exemptions are likely.
