Prop­erty mar­ket spared Bud­get pain – but watch the small print

There were few Bud­get bomb­shells for the prop­erty mar­ket, but will pain be in­flicted later? Sharon Dale re­ports.

Yorkshire Post - Property - - PROPERTY -

PO­LIT­I­CAL psy­chol­ogy worked a treat on Tues­day. Ru­mours that cap­i­tal gains tax would rocket sent prop­erty in­vestors into a panic be­fore the Bud­get, but the re­al­ity wasn’t quite as bad as pre­dicted.

Le­gions of land­lords and sec­ond home own­ers, who ex­pected the rate to rise from 18 to 50 per cent, breathed a sigh of re­lief and thanked Ge­orge for his benev­o­lence.

Ba­sic rate tax­pay­ers were thrilled that they will now pay 18 per cent on any cap­i­tal gain, while higher rate tax­pay­ers will be taxed at 28 per cent. The £10,100 tax-free al­lowance stays the same.

But the devil is in the de­tail and in­spec­tion of the small print re­veals that many ba­sic rate tax­pay­ers will end up pay­ing the 28 per cent rate when they sell.

Richard White­lock, of York­shire-based tax ac­coun­tants Gar­butt and El­liott, says: “Trea­sury doc­u­ments make it clear that an in­di­vid­ual’s cap­i­tal gains will be added to their in­come when as­sess­ing whether they are ba­sic rate tax­pay­ers for the pur­poses of CGT.

“This was not the case when we had the pre­vi­ous 18 per cent flat rate.

“Since prop­erty gains can be quite chunky, much of the gain will be paid at 28 per cent.”

The ba­sic rate tax band ends at £43,875 (it will be low­ered to £42,375 next April).

So if your to­tal in­come is £34,000 and your cap­i­tal gain af­ter the tax free al­lowance is £100,000, you will be taxed at 18 per cent on the first £9,875 (the un­used re­main­der of the ba­sic rate band) and at 28 per cent on the bal­anc­ing £90,125 (the ex­cess over the higher rate thresh­old).

Richard also warns that in­vestors should steel them­selves for pos­si­ble CGT rises in the fu­ture.

“It’s in­ter­est­ing that the Govern­ment doc­u­ments state that the tax free al­lowance will re­main at £10,100 for 2010-2011. The in­fer­ence is that may change next year,” he says.

“It’s also clear that the 28 per cent rate may well be a step­ping stone to some­thing higher next year.”

But for now Liam Bai­ley, head of Knight Frank res­i­den­tial re­search, fore­sees a short-term surge in sec­ond-home pur­chases.

“With higher-rate CGT at 28 per cent the ar­gu­ment for prop­erty in­vest­ment still looks strong, and cap­i­tal gains still com­pare very favourably with in­come tax at 40 per cent.

“Very early ev­i­dence sug­gests that the sec­ond-home mar­ket, which was very strong up un­til the CGT rise was first mooted in May and which then promptly stalled, will kick back into life very rapidly.

“We ex­pe­ri­enced a no­tice­able up­surge in calls to our sec­ond­home teams in the hours af­ter the Chan­cel­lor sat down on Tues­day.”

Own­ers of hol­i­day lets were also cheered by the Chan­cel­lor, when he re­versed a Labour de­ci­sion to scrap gen­er­ous tax breaks on fur­nished prop­er­ties.

The main tax ad­van­tages are pay­ing the en­trepreneurs 10 per cent cap­i­tal gains tax and be­ing able to off-set costs against other in­come.

But there are signs that there could be some tight­en­ing up on the rules next year.

Richard White­lock says: “The Govern­ment is open­ing up con­sul­ta­tion on qual­i­fy­ing tests for hol­i­day lets.

“At the moment the prop­erty must be avail­able to let for 20 weeks and ac­tu­ally let for at least 10 weeks and there may also be changes to the cap­i­tal gains sta­tus.

“I would say if you are think­ing of sell­ing a hol­i­day let now is the time to do it.”

Else­where in the Bud­get, there was a pos­i­tive out­look for in­ter­est rates, which are ex­pected to re­main at their cur­rent lev­els for longer and should un­der­pin house prices.

But VAT ris­ing from 17.5 per cent to 20 per cent in Jan­uary will have an ad­verse ef­fect on house­hold in­comes.

An­drew Bead­nall, of Bead­nall Co­p­ley es­tate agents, says: “I would put a sales­man’s spin on the in­crease in VAT and en­cour­age all home buy­ers to buy now and save the 2.5 per cent rise if they had been think­ing of ex­tend­ing their new home, putting in new kitchens and bath­rooms etc.”

Like other agents he is glad that the spec­u­la­tion over the Bud­get is over.

“So many peo­ple have been sit­ting on their hands wait­ing to ‘see what hap­pens’ and now we know.”

Gra­ham Bates is a prop­erty in­vestor and di­rec­tor of Ed­dis­ons Res­i­den­tial. He says: “The im­me­di­ate rise in cap­i­tal gains tax from 18 per cent to 28 per cent for higher rate tax­pay­ers is in no way help­ful to those in­vestors who are com­mit­ted to the busi­ness of sup­ply­ing the pri­vate rental sec­tor.

“While some may heave a sigh of re­lief that this tax didn’t rise to 40 or even 50 per cent (don’t hold your breath, we don’t know what is around the corner!) the re­al­ity is that prop­erty in­vestors who – un­like short-term spec­u­la­tors – work hard to build long-term port­fo­lios are sim­ply be­ing cheated of any pos­si­ble rise in bricks and mor­tar val­ues for some time to come be­cause the Chan­cel­lor will now be the one to reap the ben­e­fit.

“There needs to be a rein­tro­duc­tion of in­dex­a­tion re­lief to re­ward long-term prop­erty in­vestors and an ac­cep­tance that build­ing and man­ag­ing a prop­erty port­fo­lio is ev­ery bit as much a busi­ness as any trad­ing en­tity, es­pe­cially against the back­drop of un­af­ford­able home own­er­ship and the in­creas­ing need to sup­ply high qual­ity homes to rent. And I voted for them!”

Richard Con­roy, chief ex­ec­u­tive of Con­roy Brook house­builders, based in Holm­firth, says: “I didn’t see any­thing in the Bud­get that would help the house build­ing in­dus­try and at least they haven’t put VAT on new homes, but there are a few things that will hin­der.

“I think the cap­i­tal gains tax

The cap­i­tal gains tax rise wasn’t as big as ex­pected which is pos­i­tive and im­por­tant.

rise to 28 per cent for higher rate earn­ers will de­ter buy-to-let in­vestors and tax rises will add fur­ther fi­nan­cial pres­sure to the mid­dle classes.

“For­tu­nately, even when peo­ple have less money they will spend money on their main home. It is the most tax-ef­fi­cient place to put money as any gain is tax free.”

Kevin Hollinrake, of Hunters es­tate agency, says: “The cap­i­tal gains tax rise wasn’t as big as ex­pected, which is pos­i­tive and im­por­tant be­cause the buy-to­let sec­tor is very im­por­tant in terms of pro­vid­ing peo­ple with homes to rent.

“I think the new rates will still make prop­erty a good in­vest­ment plus a lot of pro­fes­sional in­vestors buy prop­erty for the rental in­come rather than the cap­i­tal gain.

“This Bud­get should keep in­ter­est rates low and they are the biggest driver in the prop­erty mar­ket. This to­gether with the grow­ing econ­omy should bring a rise in con­fi­dence. This should keep the prop­erty mar­ket steady.”

Ian Pot­ter, op­er­a­tions man­ager of the As­so­ci­a­tion of Res­i­den­tial Let­tings Agents (ARLA), says: “The planned rise of Cap­i­tal Gains Tax may not be as ex­treme as many had an­tic­i­pated, but it still comes with lit­tle con­sid­er­a­tion for the needs of land­lords. Be­cause of this, the Chan­cel­lor risks driv­ing those land­lords pay­ing the higher rate of tax from an al­ready very frag­ile hous­ing mar­ket, at a time when they should be ac­tively en­cour­aged to stay and, ide­ally, fur­ther in­vest.

“In par­tic­u­lar, ne­glect­ing to in­clude rollover re­lief is a big gam­ble, as many land­lords will now be pe­nalised by CGT – and hit by Stamp Duty – when they sell one rental prop­erty and pur­chase an­other. This may fur­ther dis­in­cen­tivise some land­lords from re­main­ing in the pri­vate rented sec­tor and neg­a­tively im­pact the over­all sup­ply of rental prop­erty.”

The Royal In­sti­tu­tion of Char­tered Sur­vey­ors says: “It is good news that cap­i­tal gains tax (CGT) has risen to just 28 per cent for top rate tax­pay­ers rather than the pre­dicted 40 per cent or 50 per cent, even if it is be­ing brought in ear­lier than had been hoped.

“The in­crease will hit those with sec­ond homes or those with buy-to-let in­vest­ments but only if they sell and the ma­jor­ity of own­ers take a long term view rather than look­ing for short term gain.

“Es­tate own­ers plan­ning to sell in the near fu­ture will be more concerned as a 10 per cent in­crease in CGT will trans­late into a sig­nif­i­cant amount of money where there are sev­eral prop­er­ties in­volved.

“Our be­lief is that now the Bud­get is over we will see re­newed ac­tiv­ity across the mar­ket place as home­buy­ers firm up on their fu­ture plans and take ad­van­tage of the low mort­gage rates that are avail­able to those with a good de­posit.”

WHAT’S IN THE BOX?: Ge­orge Os­borne re­veals his Bud­get.

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