Buy-to-let tax gain as market slows
Changes to capital gains tax could aid landlords - but there are warnings the market will slow.
This week's pre-Budget report announced changes to capital gains tax that will see a single tax band of 18 per cent - over the current system of ten, 20 and 40 per cent charges depending on an investor's tax band.
The upshot for many buy-to-let investors should be a reduction in tax from April next year.
"Rather than the potential 40 per cent capital gains tax an investor currently incurs on buy-to-let property appreciation, prior to any taper relief that is now planned to be withdrawn, as of April 2008, an investor will instead incur a single, flat rate of 18 per cent, from the offset," said Stuart Law, chief executive of property investment specialists Assetz.
"Unfortunately, the recent announcement does not bring such positive changes for those with holiday let property in the UK, which currently only has a capital gains tax of ten per cent once it has been purchased and run as a business for two years.
"However, on the positive side, the new 18 per cent flat rate does apply from day one, and there is still an opportunity to avoid paying tax at all by rolling over the profits on the sale into another business asset under the rollover-relief provisions."
Mr Law added the changes to the tax created further loopholes for buy-to-let investors.
"As an investor owes tax on the sale price of a buy-to-let property, less the original purchase price, those who have refinanced well above the purchase price have previously found themselves potentially owing more tax than the remaining equity in the property - a little known capital-gains tax-trap," he said.
"From April 2008, with the new lower rate of 18 per cent, many investors could find it easier to sell the property they have refinanced so aggressively over recent years without incurring a tax bill greater than the equity they release through the sale."
The changes to the capital gains tax band aimed to close loopholes used by private equity firms and simplify the complex system.
While buy-to-let landlords may be gaining, there are fears of a knock-on effect for first-time buyers.
"Any reduction in capital gains tax for buy-to-let investors is another nail in the coffin for first-time buyers," said Helen Adams, managing director of first-time buyer advice site FirstRungNow.com.
"Competing and losing to landlord investors for one and two bedroom properties, first-time buyers are already in a lose-lose situation whilst landlords are conversely in a win-win position - just about the only disincentive for landlords was the tax on capital gains."
However, there are now doubts over the future of the buy-to-let market.
Speaking on BBC One's Breakfast programme, Merryn Somerset Webb, editor of MoneyWeek, said he could not "understand why anybody would get into a buy-to-let investment right now."
"It was a brilliant idea five years ago when the numbers added up. But if you were to invest in the average buy-to-let flat today you would be losing money on a monthly basis because your yield wouldn't be as high as your mortgage payments.
"So there is no compelling investment reason to do it unless you are convinced that property prices are going to go up indefinitely. And we know that they are definitely slowing at the moment and are much more likely to fall than rise over the next few years."
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