TAX NEWS - JUNE 2010

Britain Tax: Rise in capital gains tax will hit house prices

Buy-to-let landlords will flood market say experts

by Gerri Peev and Sean Poulter, 04 June 2010 -- House prices across Britain are at risk of falling if the Government raises capital gains tax, experts warned yesterday.

Nationwide said prices will dive as buy-to-let landlords flood the market with properties.

The warning came as Business Secretary Vince Cable fuelled speculation that investors could pay more on their profits after the emergency Budget on June 22.

Mr Cable - who forecast the property crash and has warned that another bubble could be on the horizon - said second homes should not be treated differently to other investments.

'Individual capital gains are going to be taxed in a way that is closer to income tax rates. Property is part of individual capital gains,' he said.

'There is an issue about how you allow for inflation. That is something the Budget will take account of, but I don't see why that should be a specific problem.'

Mr Cable made it clear, however, that business and personal assets would be treated differently.

He was challenged by Tory veteran Michael Fallon, who urged him to reassure businesses that 'any changes to the capital gains tax regime won't reduce investment in business, particularly in new start-up businesses, and won't undermine schemes of employee share ownership'.

The Business Secretary replied: 'We are conscious of the impact of capital gains tax (CGT) on business. We want to make it very clear that any reforms will acknowledge the role of entrepreneurship and not damage it.'

Mr Cable's remarks on property are at odds with the reassurances suggested by his party leader.

Deputy Prime Minister Nick Clegg hinted that ministers were considering a climbdown on capital gains tax (CGT), as financial gains on the back of inflation could be exempted, which could offer a slight reprieve for second-home owners.

If the Government presses ahead with raising capital gains tax in line with income tax, investors would see the tax they pay on their profits rise from 18 per cent to 40 or even 50 per cent.

It is not yet clear whether tax changes would be brought in immediately or at the end of the tax year in March 2011.

Nationwide economist Martin Gahbauer said the timing of any capital gains tax changes was a key factor.

'If there is a significant time lag between the announcement of the increase and its actual implementation, then some second-home owners and buy-to-let landlords may decide to sell in advance of the higher rate being introduced.

'Such a development could lead the supply-demand balance to shift more in favour of buyers and relieve the current upward pressure on house prices.'

There would be little immediate impact if the capital gains tax rises were brought in on Budget day, with no deadline, as landlords - who own 10 per cent of the housing stock - would have no time to react.

But such a move could end up raising prices in popular areas, as second-home owners could be forced to cling on to their properties for years in the hope of a change of policy or earning discounts for investing over the long term.

House prices rose by 0.5 per cent in May, half the rate of the previous two months but enough to lift values to within 10 per cent of their peak in 2007.

Prices have risen 12.2 per cent since the slump in February 2009 and are just 9.5 per cent below their October 2007 peak.