The Great Capital Gains Tax Heist

Hello, Medway Property News Readers.

You will undoubtedly have read in the news about how the chancellor has received a recommendation by the Office of Tax Simplification (OTS) to overhaul Capital Gains Tax (CGT) in what I am calling The Great Capital Gains Tax Heist.

The proposed measures would see Capital Gains Tax rise to match the level of income tax. This would represent a significant rise for investors and a significant blow to an already battle-weary sector.

In simplest terms, the proposed measures would see the current maximum Capital Gains Tax rate of 28% increase to somewhere nearer 40% – 45%. The proposals also suggest reducing the CGT threshold from £12,300 to £5,000 or less.

As you can imagine, this announcement has not been well received by property investors, many of whom will have chosen to invest in property as a means of topping up their pension upon retirement.

Whilst CGT only has an effect when selling, raising it could have a number of unintended effects on the rental market as it may mean that some landlords could potentially find themselves trapped with a property that simply does not have enough equity to pay off the tax due because it is too highly leveraged.

What Does This Mean for The Property Market?

As you will have seen over the past few months, with the predictions at the start of the year and current situation of the property market, it is difficult to accurately predict what the impact could be.

Furthermore, the change is just a proposal at the moment and may not come into force – although, it can be said that a change in this area is due and it is likely, therefore, to materialise.

In anticipation of this proposal taking effect, we’re likely to see a number of investors selling properties to avoid the additional tax. Depending on the magnitude of this, I suspect we could see a dip in house prices as more come onto the market.

I would also expect, unfortunately, to see an increase in the amount of sub-standard properties. Landlords may choose to keep additional equity within their portfolio to cover the increase in cost, making this capital unavailable for re-investment into the properties.

The current recommendation becoming a reality could also have a negative impact on the property market if investors choose to hold onto properties and release monies for reinvestment as opposed to paying it in tax by selling. Ironically, this could further exacerbate the housing crisis by pushing up property prices (just like another the stamp duty cut…) and widening the gap between homeowners and renters!

What Does This Mean for Investors?

If the rate increased from 28% to 40% and the threshold reduced to £5,000, based on average Medway property prices over the past decade, we can calculate an indicative cost for higher rate landlords.

There are, of course, several variables which make this calculation indicative only. However, it does give an idea of the impact on investors. I have used the example scenario of an investor that has purchased a property for £150,672 in August 2010 and is considering selling it at today’s average value of £243,337.

Current rate

Profit from selling:                                      £92,665

First £12,300 tax free

£80,365 taxed at 28%:                                     £22,502

Profit after CGT                                             £70,163

Proposed 40% rate

Profit from selling:                                      £92,665

First £5,000 tax free

£92,665 taxed at 40%:                                     £35,066

Profit after CGT                                             £57,599

Based on this rough calculation, you will see how the proposed increase in CGT could cost Medway landlords a significant amount and the longer a property is held, the more significant the increase could be (for example, a property purchased in 2000 and sold in 2020 could cost a landlord an extra £21,640).

Whilst this is yet another burden landlords may have to bear to help pay for the cost of COVID-19, it does highlight the importance of good quality, long-term financial and tax planning. The area of tax planning and stress testing is something that is all too often overlooked, however, as your portfolio grows it’s a crucial element to operating a successful, long-term investment.

Property does remain an excellent means of long-term investment; property investors simply need to be agile in their ways of working and the market will adapt to any changes over the long term as it historically has.

I trust that you found this article helpful and I will keep you updated as more information becomes available. If you have any questions, you are welcome to get in touch with me via LinkedIn where I will be happy to help where I can.

Hasan

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