How did the residential property sector fare in the budget?
24th June 2010
Residential property neither won nor lost much in the Coalition’s first budget on the 22nd June. “Many will agree that things could have been a lot worse for the residential property sector”, says Mark Morison, partner at Roger Parry & Partners LLP.
The Chancellor ignored calls for reform and the existing Stamp Duty regime remains in place. The £250,000 Stamp Duty break for first-time buyers escaped unscathed and the tax clampdown on furnished rental holiday homes will not go ahead. However, most focus was on the rise in Capital Gains Tax (CGT), from 18% to 28% for higher-rate taxpayers, particularly its effect on the buy-to-let market.
At 28% CGT is still considerably lower than the rates of three years ago (up to 40% before Labour introduced the flat 18% rate), however, the consequences could be felt by a wider number of taxpayers. “Initially the new rate appears to only affect higher earners but in reality, people on lower incomes could also be caught by it”, say Mark Morison. ”The 18% CGT rate for people on basic rate tax will increase to 28% if the gain, when added to their income, pushes them over the threshold into the higher rates of tax”.
The new CGT regime could undermine the residential lettings market. Although not as extreme as many had feared, the review still comes with little consideration for buy-to-let landlords’ and risks driving them out of further investment in an already fragile housing market, at a time when they should be actively encouraged to stay.
“Despite lobbying by many property bodies for a break the application of the tax increase on this sector without reform to include rollover relief represents a big gamble, as many landlords will now be penalised by CGT and hit by Stamp Duty when they sell one rental property and purchase another”, continues Mark Morison. “The result will be to remove any incentive for some landlords to remain in the private rented sector and negatively impact on the overall supply of rental property.”
Some commentators referred to lobbying for CGT breaks for landlord investors as no more than wishful thinking. The Chancellor has undoubtedly realised that there is no good reason why an investor in property should be taxed differently to an investor in say the stock market. Buy-to-let investors will just need to be more frugal in their investment strategy.
Overall it is perhaps unlikely that the rise in CGT will have a detrimental effect on a property market that is still in the early stages of a recovery. The Government helped significantly by announcing the CGT increase with immediate effect, therefore avoiding the encouragement of panic-selling by landlords and people with second homes. The market may otherwise have been flooded with properties as investors desperately tried to sell before the higher rate tax kicked in.
“The tax hikes will not help the construction sector either. Consumers have been put under increasing pressure and this is likely to lead many to shy from investment, but on the other hand at least the market now knows where it stands”, concludes Mark Morison.