CAPITAL GAINS TAX – BEGINNING TO LEVEL THE PLAYING FIELD BETWEEN INDIVIDUAL AND CORPORATE INVESTORS

Yolande Barnes, head of residential research at property adviser, Savills, comments on the changes to CGT announced in today’s Budget:
The limiting of the CGT rate to 28% for upper rate taxpayers is a welcome deviation from the feared 40% or 50%.  Also to be welcomed is its introduction from midnight tonight.  A delayed or phased introduction would have led to second home owners and investors selling to beat the deadline and might have increased supply, depressing prices.
For a higher rate taxpayer who bought the average priced home ten years ago, as a second home or investment, and who sells it tomorrow, the changes will mean that they pay an extra £7,500 compared to what they would have paid yesterday.  This represents an extra 56% in tax on the £85,000 gain.
Longer term, the raising of capital gains tax may discourage individual investors who make up the vast majority of residential property landlords.  Although the luxury of a flat 18% CGT was only in place for two years, its demise removes the incentive for investors to gear up against the expectation of significant capital growth. 
The change announced today will, however, begin to level the playing field between investment returns comprised of income and those derived from capital gains.  This means that there is less incentive to look for high capital growth prospects as against yield and rental growth.  This may start to subtly influence investment decisions in favour of the latter.
The new CGT rate also begins to even out one of the many differences between corporate investors and individual investors in the residential sector and between individual landlords and professionally managed corporate landlords and, while there are many more anomalies between these two to iron out, it may, in theory at least, encourage individuals to invest in corporate entities rather than direct into property.
Overall, there are inherent risks in discouraging any type of landlord at this time of growing demand for private renting. There are currently insufficient numbers of corporate investors and fund managers to take up the slack if private individuals withdraw from residential lettings.  Compelling ‘pull factors’ still need to be put in place as a matter of urgency to attract corporate or institutional investors to the sector and to increase rental supply.

Yolande Barnes, Savills

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