Capital Gains Tax Increase - Fresh views

With news that the new Con/Lib coalition are to raise the tax due on Capital Gains for anyone selling a second property Fresh Invest shares it’s views on how this may affect the property investment market.

Firstly let’s decide why the government has decided to impose this new tax there are 2 main reasons:

1. The previous government has run up an astronomical budget deficit – hence the note recently left by the outgoing treasury minister Liam Byrne, to the new chief secretary David Laws which stated “Dear chief secretary, I’m afraid there is no money. Kind regards ­ and good luck! Liam.” For this reason it is imperative that the new government make a lot of cuts, to bring the level of this deficit to an acceptable level they need to recoup money from the tax payers and this new capital gains tax will do just that.
2. The second reason is that because of the slack lending criteria over the past decade many people have bought up a large amount of property in small holiday towns throughout the south of England, through this they artificially increased the prices of all the houses around these areas and they are now financially out of reach of the average worker in those towns.

The government is therefore going to impose an increased Capital Gains Tax on all second home sales as a way of raising cash for themselves and a way of stopping people becoming too greedy and putting house prices out of reach for first time buyers in holiday locations throughout the UK.

Now what could happen as a result of an increase in Capital Gains Tax?

The big sell off – This first scenario would really depend on when the government decides to impose this new tax, if they decided to impose the tax from the new tax year i.e. 6^th of April 2011 then I would suspect a big sell off of second homes in desirable locations, creating a very large influx of supply into the property market and without the demand to match, probable falls in prices.

The buy and hold – The other scenario, I believe would also depend on the time the new tax is imposed. I would suspect that if it was to be imposed straight away then second home owners and investors alike may decide not to sell their properties as the gains are no longer high enough. Hopefully this will not cause any form of stagnation in the already fragile property market.

One thing is for sure. This will slow down the purchasing of property just for the capital gains that come with it, as the risks may begin to outweigh the possible rewards .An advantage of this however will mean that investors do not inflate property prices further and therefore eliminate first-time buyers from the market. Hopefully this will lead to longer, sustained growth.

Maybe it’s time to look to the overseas property market for your significant capital growth?

What are your views?

Fresh Invest is a property investment company with the aim of maximising our investor’s funds whilst minimising their risk. For more information see www.freshinvest.co.uk or phone 0800 043 69 56.