House prices could fall on back of CGT rise

Property experts have warned there will be a major sell-off of investment properties and second homes as well as a further dampening in house prices if capital gains tax (CGT) is raised under the new coalition government.

As part of a package of tax reforms agreed by the Con-Lib coalition, CGT will be raised from its current flat rate of 18 per cent to rates “similar or close to those applied to income” - though there will be exemptions for entrepreneurs.

The tax change is likely to cause property investors to sell up in the short-term and put others off buying property over the longer-term, property experts warned.

A flood of properties onto the market could also see house prices drop further than forecasted this year as the imbalance between supply and demand eases.

The National Landlords Association (NLA) has called on the government to include capital gains from the sale of residential property in the “generous exemptions” that include entrepreneurs.

David Salusbury, chairman of the NLA, warned that the proposed CGT rise will act as a “barrier to further investment in residential property just at a time when there is an urgent need for more housing”.

Stuart Law of Assetz, the property investment group, said it was “imperative” to keep the current 18 per cent tax rate in order to secure a full recovery for the property market.

“Any exorbitant increase on the tax rate, with current figures suggesting this could reach as high as 50 per cent, will only slow economic growth and scupper the government’s promise to revitalise the markets,” he said.

However, some experts said the CGT increase was unlikely to dampen the buy-to-let and second home market.

Liam Bailey of Knight Frank said most second home owners buy for the long-term. “Ultimately people buy second homes as something to use, rather than for capital gains,” he said.

Stephen Ludlow, of ludlowthompson.com, a London letting agent, said buy-to-let investors were more interested in long-term, high-yielding investments rather than short term capital appreciation.

“Buy-to-let investors are usually looking for a steady income for their retirement and intend to leave the property to their children so capital gains tax is not so important,” he said.

According to some property experts, the new tax change could also have a positive impact on the UK property market. James Hyman, partner for residential sales at Cluttons, said it “could give the London market the supply it has been crying out for over the last 18 months”.

First-time buyers are likely to benefit from lower house prices and less competition from buy-to-let investors - although Ray Boulger of John Charcol, the mortgage broker, warned that the tax change could hit the pockets of first-time buyers saving for a deposit, as rents could rise if there are fewer rental properties on the market.

Meanwhile, the property market welcomed the decision not to implement the Liberal Democrats’ mansion tax proposals as well as the confirmation that Home Information Packs would be axed under the new government.

“Homeowners across the country will be relieved to hear that the Lib Dems’ famed mansion tax will not be a feature of the new coalition government,” said Andrew Smith of Primelocation.com. He said the levy would have hit thousands of £2m-plus homes, 57 per cent of which would have been in London.

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