I commented yesterday that the new government looks set to increase Capital Gains Tax (CGT) with rises from 18% to 40% looking very likely. Will this have a negative impact on house prices?
The announcement that CGT will rise substantially soon is going to cause a frenzy of activity with investors, particularly if they are sitting on large unrealised capital gains.
Many property investors could seek to sell their properties now to lock in their capital gains before the large tax rises come into effect. For example, buy-to-let landlords could be hit particularly hard as for every £100,000 of profit, the investor would pay an extra £22,000 in tax when CGT rates rise to 40%.
By pre-announcing these tax rises, it is likely that property investors will rush to put their properties on the market as soon as possible, in the hope of beating the increased CGT liabilities. Although many estate agents report a shortage of housing stock at the moment, a sudden influx of new instructions from investors could distort the market in favour of buyers.
We all know where that could lead – house prices could fall, or at least, not increase in value, over the next few months.
So CGT more than doubling could have a negative impact on house prices, but what about the impact on the buy to let investment market in the future?
The professional property investor takes yield as the main indicator of investment potential. Any capital gains are “nice to have”. As long as there continues to be good yields in letting out property, then there are bound to be landlords looking for investment opportunities.
Those same investors, however, are going to have to look carefully at the impact of CGT on their investment strategies – there is no doubt that 40% tax on capital gains will deter many. Buy to let investments may well become the preserve of the professional, rather than the amateur in the future.
The problem over the long term is that taxes very rarely come down, once they have been raised. If the new government does raise CGT to 40% then you can be pretty certain that we will have to live with high taxes on capital gains from now on.