Second-home owners who breathed a sigh of relief when the Chancellor revealed a lower-than-expected capital gains tax (CGT) increase should read the small print. Property experts are concerned that the higher rate does not take inflation into account and so may discourage long-term investment in the housing market.
From now on, higher-rate taxpayers will pay 28 per cent on any profits when they sell properties that are not their main residence, while basic-rate taxpayers will continue to pay 18 per cent. Many had expected the Chancellor to raise the top CGT rate to 40 per cent to bring it more closely in line with income tax bands.
However, some property experts say that the problem with this method is that it increases the tax burden without offering a sweetener such as indexation, which only taxes profit above inflation, or tapering, which was introduced under Tony Blair but scrapped by Gordon Brown, and which reduces tax rates the longer the asset is held. So if you keep your property for ten years, your tax rate falls from 40 per cent to 24 per cent. Some backbench MPs, including John Redwood, have been calling for its return.
Under the new system, if property prices do not rise above the rate of inflation over the course of a decade, a higher-rate taxpayer selling a property worth £1 million after ten years would now pay £75,624 in tax — despite not making any money in real terms. Liam Bailey, the head of residential research at Knight Frank, said: “With taper relief and indexation removed, there is now no incentive to hold investments for a long time. This could create more speculation and volatility in the market. It could also discourage long-term buy-to-let investment, which is obviously bad news for the rental sector.”
A quarter of investors will now reconsider further property investment, despite the relatively modest tax increase, according to LSL Property Services. David Brown, the director of LSL, said: “With less public money available to build houses for the UK’s growing population, buy-to-let provides homes for those unable to buy. The Government should be encouraging the growth of the sector.”