Market Reports
August 29, 2024
What impact would a change in Capital Gain Tax have on the property market?
We spoke to some Members agents of The Guild of Property Professionals about the impact a Capital Gains Tax (CGT) increase could have on the property market.
According to Joe Gervin, Director and In House Solicitor at LPS Real Estate, Liverpool, the tax changes would have a significant impact on landlords as the focus on capital gains of properties would have to shift towards a longer-term rental income model. Coupled with 3% SDLT to landlords and mortgage interest rate relief being eroded, the Government is squeezing the fat from the buy-to-let sector, especially, for the smaller, non-limited company, landlord.
Director at Heather & Lay, Tim Heather believes that a CGT rise will have the inevitable effect of creating a short-term spike in the sales market created by those exiting the market seeking to cash in earlier than planned to avoid the punitive tax charges. “Many of the smaller BTL landlords entered the market to try and prop up low interest and poor performing savings accounts and will be forced to ‘get out while they can’,” adds Heather. “The inevitable effect will be less available property to rent, in an already under served private rental sector. Rents will unquestionably continue to rise as a consequence.”
He continues by saying, “Meanwhile the ever more policed and regulated PRS reels under the can kicking from the housing minister on the evictions crisis, underrepresenting landlords whilst embracing the left-wing ideology of organisations such as Shelter. The Government has made no secret of its disdain for small landlords, despite the huge collective numbers that provide a vital housing provision. This is in marked contrast to the successive government’s woeful under provision of much needed housing social and affordable housing.”
According to Paul Oughton, Partner at Moore Allen & Innocent, any increase in CGT rates is going to reduce the net funds released from selling a buy-to-let property, which then makes competing opportunities less attractive. He adds that CGT gains on property sales are lumpy receipts of gain whereas CGT gains on say, shares, can usually be planned and realised over several tax years or can be owned within tax-free wrappers in the first place.
Who will it affect more, second homeowners or landlords?
According to Gervin, both buy-to-let landlords and second homeowners will be impacted as an additional 12% tax on property value rises will be a big hit to gains.
Oughton comments, “I think a rise in CGT will affect landlords more than second home-owners, but not only existing landlords looking or needing to sell, but also potential landlords looking to invest in the sector, who will now be put off due to the increased regulation and taxation.” He adds, “Most second homeowners are in a more comfortable position and likely to choose to have a second home whereas many landlords own a rental property as a way to supplement their income or as a retirement pension.”
What will the long-term consequences of a rise be for the market?
Gervin comments that behaviour wise landlords will need to buy in limited company structures and focus on rental income as opposed to capital gains. “It could decrease the appetite for buy-to-let particularly to small portfolio investors.
Heather adds that the inevitable consequence long term will be much-reduced transaction numbers with landlords and second homeowners holding their investments and not entering the market at all unless it is for the very long term.
According to Oughton, if the CGT burden becomes prohibitive for landlords who were looking to sell, more will retain their properties, which will reduce the supply of typically lower value, housing available for first time buyers and for new households being formed from separation, divorce, etc.
“If landlords must commit to the rental market longer term, then they will more likely look to ensure that they achieve a market rent year on year, which again will have a knock-on effect to those less able to afford to rent. There is a natural level of tax, and by increasing CGT (without corresponding reliefs or indexation taper) the Government is overstepping the threshold which will lead to a fall in the tax take collected. As with a lot of recent Government legislation regarding lettings, this appears another policy to play to mass voters rather than forming the basis of a sustainable economic policy,” says Oughton.
According to Rowan Waller, Managing Director of Wallers Estate Agents, the appeal of buy-to-let for investment has already been knackered by the hefty stamp duty increase at the point of purchase combined with the eroding tax relief on the mortgage interest over the last few years, which means that many would-be landlords without experience have avoided it and many over-leveraged landlords have already exited the market and sold up. “There will naturally be some landlords that will see it as the right time to sell if CGT increases significantly – but it depends when the new legislation will kick in and whether they can physically get rid of their tenants soon enough to capitalise on it, whilst the current required notice period is six months. What I think more likely is that sales of properties for flipping will drop significantly but buy-to-let sales will not drop particularly further than they have already over the past four years or so. The market that remains will be a more experienced and savvy landlord investor in it to play the long game, the portfolio builders who are in it for the monthly rental income and the long-term asset value growth for leverage-purposes, rather than near-term profits. Such landlords might be more likely to extend the timelines they may have had for liquidating their assets – maybe another five to seven years, to offset the extra CGT – so there could be an impact on volume of properties coming to market for sale generally, but nevertheless, with the amount of new building going on at the same time, I suspect the tangible effect of that will be negligible. Time will tell!”
Will a rise create a cliff edge that will produce a spike in sales, much like landlord tax changes produced a spike in purchases a few years ago?
“We do not think that buy-to-let to investors will flush the market. Most investors are seeking long term income and treating properties as a pension pot for income generating. As such, we do not think the floodgates would be opened as a result of a CGT increase, however, it will deter many from increasing their portfolio particularly those focusing on capital gains rather than rental income. We expect more landlords focusing in areas like Liverpool to capitalise on higher rental incomes, as opposed to South Cities where capital prices are higher with lesser yields,” says Gervin.
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