TAX NEWS - JUNE 2010
UK Tax: Tax hike may stifle B2L recovery
The government's plan to raise Capital Gains Tax from 18% to up to 40% on second homes comes just as confidence appears to be returning to the buy-to-let market.
The increase in Capital Gains Tax (CGT) proposed by the coalition could drastically reduce landlords' gains. The government says it will replace a flat tax of 18% on the sale of non-business assets with Income Tax bands of 20%, 40% and 50% to pay for a rise in the Income Tax exemption threshold to £10,000.
This spells bad news for investors and landlords who are likely to have to pay Capital Gains Tax (CGT) at a rate similar to their Income Tax level. Everyone has an annual CGT-free allowance, which is currently £10,100 a year. Beyond this gains on second homes, shares and other investments see the tax charged at 18%. It is likely this will now change, with individual Capital Gains Tax rates brought back in line with Income Tax.
Because they can't sell properties over a period of time to minimise Capital Gains Tax (CGT) investors will be hit hard. Depending on whether the taxation changes are brought in immediately - which is unlikely - or from April 2011, a rise in Capital Gains Tax (CGT) could prompt a rush of buy-to-let investors selling up to avoid seeing their tax bills double.
Whether taper relief will be brought back in, which would cut the tax burden on assets held for the longer term, remains to be seen.
B2L investors are entrepreneurs
The National Landlords Association has called for buy-to-let investors to be considered as entrepreneurs and exempted from higher taxes, and I agree.
Meanwhile, after a tough couple of years for landlords, many of whose investments were left in poor shape as unlet properties flooded the market and buy-to-let mortgages all but ended, new figures suggest the outlook for the sector has never been better.
The buy-to-let market is poised for a strong rebound if demand for private rented accommodation continues to increase until 2014 as expected.
A Datamonitor report forecasts that buy-to-let lending volumes will almost double from the 2009 level of £8.5bn to some £15.8bn in 2012, and rise to £25.6bn by 2014.
The forecast coincides with The Mortgage Works, one of the biggest lenders to landlords during the boom, increasing its LTV to 80%. This is the first time since 2000 that the lender has lent up to 80% LTV.
The number of buy-to-let mortgages on the market has jumped by 70% since the market's low point in September last year. There are now 304 deals available for investment landlords - up from only 179 in September, according to Moneyfacts.co.uk. But the level of choice is still a long way off the 3,662 deals that were on offer in August 2007 before the credit crunch took its grip. The choice for landlords with only small deposits or equity stakes has risen, with 29% more mortgages now available for consumers with only 25% to put down, while the average interest rate charged on a two-year fixed-rate loan has dropped from 5.96% in September to 5.66% now.
Annual returns have risen sharply along with increasing rents, according to LSL Property Services, the letting agent network that owns Your Move.
In the past year annual returns on buy-to-let property have risen to £19,765 - or 12.8%. This means the average landlord would have made some £7,115 in rent and £12,650 in capital appreciation in the past 12 months.
Rents began to rise last year when improving house prices prompted so-called accidental landlords, who rented only because they could not put their houses on the market, to sell.
Now, in many areas rents are almost back at their 2007 peak. In April, the average rent in the UK rose by 0.6% to £663 per month - 2.2% higher than a year ago.
In London, where house prices have risen by 13% in the past year according to the Land Registry, prospects are particularly promising, with an average annual return of 18.8%, or £39,090. This compares with 5.1%, or £6,875, in the North-East.
Importantly, lenders are looking favourably on the sector once more.
In the recession buy-to-let mortgages suffered more than most as lenders tightened their criteria significantly, demanding 35% deposits instead of the usual 15%.
Many landlords who wished to take advantage of lower property prices had their hands tied and, according to the Council of Mortgage Lenders, only 93,500 buy-to-let mortgages were arranged in 2009 - a quarter of the number seen in 2007.
So despite the possible increase in Capital Gains Tax (CGT) the buy-to-let market is looking hot to trot again and the longer term future looks bright.
As more lenders get back into the market with attractive deals investors old and new are likely to be tempted to jump in.
Of course, this spells good news for mortgage brokers as the sector bursts into life again and demand increases.
Let's just hope the potential Capital Gains Tax increase doesn't put a spanner in the works of buy-to-let at this sensitive time, and that the coalition government doesn't have any more unpleasant surprises in store.
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