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.
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.