Coalition plans to raise Capital Gains Tax are not good news for central London property market

The Conservative-Liberal Democrat coalition agreement, released last week, includes plans to “seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income”. The government is yet to confirm when the planned raise in CGT will take place, currently at 18%, and by how much, although the levels suggested are 40-50%, or equivalent to ones marginal income tax rate.

Alex Thompson, Director at Winkworth Notting Hill, explains how people are already staring to think ahead should there be any changes in fiscal policy that may affect them:

“We are already receiving enquiries from clients, who are concerned about the potential tax liability on their second homes in London which they either rent out or use as a pied-à-terre. If the proposals to significantly increase Capital Gains Tax (CGT) liability from 18% to possibly 40 or even 50% are implemented they could potentially incur huge tax bills. For example, a property worth £1million now and purchased for £500,000, might currently have a maximum tax liability of some £80,000. Were CGT to become one’s marginal income rate, this could become as high as £250,000 and that’s a lot of money.

Whilst normally we might expect such a change to take place at the beginning of the next tax year, in the current environment it is possible it might be implemented sooner and if at levels as high as 50% – we could potentially see a sharp increase in supply by those looking to beat the tax rise.

Such a tax increase might also adversely effect demand. An extremely high proportion of existing demand is cash buyers looking to invest in the London market, many looking to add to their portfolio of pension investments. They might feel less inclined to do so with such an increase in their eventual tax burden.”

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