CGT is currently set at a flat rate of 18 per cent but there has been widespread speculation that this will be converged with Income Tax bands at 20, 40 or even 50 per cent under the new coalition government.
Leaders’ managing director, Paul Weller, says:
“The potential of buy to let to provide an annual rental yield, as well as to provide capital gains in the long-term, has long appealed to a wide range of investors and will continue to appeal as an enduring asset class.
“We do not believe landlords will act hastily in the face of a possible CGT rise. They know that buying to let is a long-term investment which brings with it a good chance of a capital gain - unlike many other assets classes - and after all, a taxed gain is better than no gain or a loss. Besides, assets other than property that achieve capital growth will also be subject to CGT.
“At the same time, with rents now rising as they are because of high demand, the income earned through property is likely to be much higher than derisory interest payments on any cash realised through selling an investment property, particularly as only the net proceeds after any CGT will be available to invest. Interest rates are currently around 1% whilst rental yields of 6% are now achievable.”
Mr Weller also points out that CGT only dropped to the current rate of 18 per cent in 2008; prior to that, when many landlords began investing, it was significantly higher.
For any landlords considering whether they should cash in on their investment ahead of a potential CGT rise, Leaders advise caution.
Mr Weller continues:
“Firstly, you need to consider where else you would put your money right now. As well as interest rates being so pitifully low, stocks and shares are no more enticing; you only have to look at what is happening to BP, a blue-chip British company whose share price has almost halved over the last 6 weeks, and who may consider suspending dividend payments. Property values tend to rise over the long-term making bricks and mortar a more solid investment.
“Secondly, your rental property may have increased in rental value over the last few years; we have seen rents gradually rising and if you have been renting your property for some time and not had it valued recently you may be pleasantly surprised by the rent it can command in the current market.
"At Leaders we will be happy to give free, impartial and expert advice on your property’s rental value and we are not conflicted by the possible sales fee an estate agent may be considering if your property is sold.
“Thirdly, for anyone thinking about selling their property before any CGT rise and then re-investing in a new buy-to-let property, they need to bear in mind the dual transaction costs and stamp duty that may be payable on the new property. Any potential savings on CGT would need to outweigh these costs to make this course of action worth taking.”
Whilst Leaders does not believe that an increase in the CGT rate will cause sensible landlords to dismiss buy-to-let or cash in their chips, the firm is concerned about the disconcerting short-term effect the uncertainty of a possible rise is having on the market, which currently needs more investment.
Mr Weller adds:
“We have written to the Housing Minister ahead of the Emergency Budget on 22nd June urging the government to dispel the uncertainty over CGT and to give careful consideration to the UK’s private landlords.
“The Private Rented Sector (PRS) currently accommodates 13% of UK households and needs nurturing if it is to continue to provide a good choice of homes to the millions of people who either choose to rent, or rent because they are unable to buy. We are seriously concerned about the current shortage of good quality property available to rent and urge the government to do all it can to encourage new investment in this sector.”
Mr Weller points out that with demand outstripping supply, rents are rising and more tenants and would-be tenants are finding rents increasingly unaffordable. This situation will worsen if investment in the sector is not encouraged.
Mr Weller concludes:
“If there is to be an increase in CGT we would urge the government to ensure that suitable concessions are introduced alongside. Many private landlords are not wealthy people, but ordinary individuals who have chosen to invest in property to provide for their retirement so that they will not be a burden on future taxpayers.
"It would be wrong for them to be penalised by the tax system for doing so. If CGT rates do rise then appropriate concessions, such as generous taper relief, that will support long-term investment are essential.”
