Nine out of ten landlords oppose government proposals to raise Capital Gains Tax for second homeowners and property investors, while 26% of landlords polled by LSL will consider selling their property before the higher tax is introduced.
The proposed tax increases are likely to have an even bigger effect on future investment in the private rental sector. 71% of landlords surveyed state that an increase in Capital Gains Tax will make them reconsider future investment in property.
Although the profitability of property investment is determined by a combination of rental income and capital gains, landlords appear to place greater importance on capital gains.
While 30% of landlords give equal importance to rent and capital appreciation, 36% of respondents consider capital gains the most important aspect of property investment. Of these, a quarter state that they only consider capital gains when judging an investment.
Simon Embley, CEO of LSL Property Services, comments:
Over the past two years, investment properties have accounted for 30% of sales across our network over 40,000 transactions. Foisting a tax-hike on property investors will drive many from the housing market at a time when its recovery is still perilously fragile.
"If potential landlords are discouraged from investing, we will see a large proportion of the demand for house purchase disappear, and house prices may fall. A further fall in house prices will see more home-owners in negative equity potentially triggering a significant rise in repossessions as owners lose confidence in the market
Under the new tax proposals, long-term investors will suffer the most. For instance, in the last twenty years, the average house price has risen from 44,880 to 168,202. This means that an investor who bought in 1988 and wanted to sell would be liable for tax on 40% of 113,222 .
As a result, an investor who bought twenty years ago as part of a retirement strategy will face a tax bill of 45,288.
Of the landlords still committed to the private rental sector, 41% are unable to sell property before the tax is introduced because their property portfolio represents their retirement plan.
Simon Embley continues:
If Capital Gains Tax is to be overhauled, we need to see the reintroduction of taper relief. As it stands, the new tax regime will rein-in future investment, not to mention hammer investors who have already bought second homes for a retirement nest egg.
"Prudent property investment is a long-term venture, and the new government needs to take this into account, not penalise it.
Taper relief was originally introduced in 1998 before being replaced by the Entrepreneurs Relief in April 2008. It exempted a percentage of an investors capital gain depending on how long the asset was held.
For example, a property sold after three years would qualify for the minimum of 5% taper relief, whereas a property held for ten years would qualify for the maximum of 40% taper relief.
Simon Embley concludes:
The private rental sector is vital to housing the UKs growing population. There is a chronic shortage of residential housing available and this is going to get worse.
"Social housing will not cover the shortfall. The government needs to encourage the growth and professionalization of the sector not deter it.
This potential new tax regime will discourage institutional investors as much as it will private landlords from entering the market. We would like to see the government encouraging investment from trusts and property funds by abolishing stamp duty for property investment vehicles like REITS, and waiving the 2% fee these trusts face when entering the market.
