If the first budget from the new government goes ahead as it has been trailed, it could have a profound effect on the buy to let market. It looks possible that the capital gains tax could be increased from 18% to 50% with the annual exemption being cut from £10,100 to as little as £2,000. This tax could be very unpopular as it does not just affect the rich trading profits in shares, but also the person who may have invested in buy to let as a way of providing a lump sum to live on in retirement.
If the proposals go ahead it means that anyone selling their property in the current environment who paid £50,000 for it in 2000 and now goes on to sell it for £120,000 will pay capital gains tax of £11,000 giving them a net profit of £59,000. If the changes to capital gains tax do take place, the same person will have to sell their property for £167,000 an increase of 39% to enjoy the same gain.
As you can see the potential difference is enormous on the before and after basis. It would therefore make sense for many people within reasonable distance of retirement to sell now rather than later, providing the legislation is not retrospective. If they cannot sell now, they will just have to soldier on for longer in work until they can reach the net figure that will afford them a tolerable retirement income. I am told that there have been 647,300 buy to let purchases in the last six years, so I would consider it not unreasonable to consider that overall there may be up to one million buy to let landlords in the UK. So, if a significant number decided to market their properties on a must sell basis to avoid the new tax, I could see a market collapse in the lower to middle end of the housing market as everyone heads for the door at once. In addition the knock on effects could also cause hardship for tenants who have to leave, and may find it difficult to find alternative accommodation as the supply of rented property decreases. If the proposals go through the buyers in the market are unlikely to be buy to let investors as the tax burden on sale will deter them.
The last government for some reason made capital gains tax a very attractive tax to pay particularly for short term investors. Therefore I do not think it is unreasonable to reform this tax in an effort to curb the excessive risk takers, who are more interested in short term gains rather than long term sustainability. However, although I accept this government needs to raise extra revenue I suggest they concentrate on taxing short term speculative investors rather than people who have been enterprising and are in the housing market for the long haul. I hope the government take note of all the capital gains lobbying, so lets keep our fingers crossed for the emergency budget on June 22.
Kieron Bassett Financial Services have two Independent Financial Advisors. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.
Kieron Bassett CertPFS
1st June 2010
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