Capital Gain Tax

Capital Gains Tax - levelling the playing-field between individual and corporate investors

Source: http://www.savills.co.uk

Yolande Barnes, Head of Residential Research at property adviser Savills, comments on the changes to Capital Gains Tax (CGT) announced in today's Budget:

"The limiting of the CGT rate to 28% for upper rate tax payers is a welcome deviation from the feared 40% or 50%. Also to be welcomed is its introduction from midnight tonight. A delayed or phased introduction would have led to second home owners and investors selling to beat the deadline and might have increased supply, depressing prices.

For a higher rate taxpayer who bought the average priced home ten years ago, as a second home or investment, and who sells it tomorrow, the changes will mean that they pay an extra £7,500 compared to what they would have paid yesterday. This represents an extra 56% in tax on the £85,000 gain.

Longer term, the raising of capital gains tax may discourage individual investors who make up the vast majority of residential property landlords. Although the luxury of a flat 18% CGT was only in place for two years, its demise removes the incentive for investors to gear up against the expectation of significant capital growth.

The change announced today will, however, begin to level the playing field between investment returns comprised of income and those derived from capital gains. This means that there is less incentive to look for high capital growth prospects as against yield and rental growth. This may start to subtly influence investment decisions in favour of the latter.

The new CGT rate also begins to even out one of the many differences between corporate investors and individual investors in the residential sector and between individual landlords and professionally managed corporate landlords and, while there are many more anomalies between these two to iron out, it may, in theory at least, encourage individuals to invest in corporate entities rather than direct into property.

Overall, there are inherent risks in discouraging any type of landlord at this time of growing demand for private renting. There are currently insufficient numbers of corporate investors and fund managers to take up the slack if private individuals withdraw from residential lettings. Compelling 'pull factors' still need to be put in place as a matter of urgency to attract corporate or institutional investors to the sector and to increase rental supply."

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Deposits or insurance?

The tenants' deposit is not the equivalent of a new-for-old insurance policy.

The government knows that tenants do a bit of damage here and there so they give you 10% leeway on your rental profit for 'wear and tear' per year. They also kindly allow you to offset any expenditure on your property against your profit to reduce your taxable profit even further.

Folks like HomeLet offer landlord insurance policies to cover damage by tenants or the burning down of your property at pretty reasonable rates.

Or you can self-insure by putting away a bit of your monthly rent and not using it all to finance expensive cars or three holidays a year.

So why oh why do some landlords want to squeeze the tenant all the time? Why have they forgotten that there is a little bit of risk in every investment and frankly you are better off with a flat or a house as an investment than you would be with Equitable Life, Kaupthing or AIG to name a few.

All landlords need to treat their properties like a business. If you had a sweet shop you would expect some seasonal ups and downs as well as the possibility of the credit crunch affecting the business in some way. Little and often would be the best kind of scenario with happy customers and repeat business keeping things on the right track.

Investing in property should be seen the same way; it won't always be 'making hay while the sun shines' and there may be bumps in the road but if you keep everyone happy and watch the pennies whilst maintaining your property in a good state (note that I didn't say perfect there) it will all work out in the end.

Fair and reasonable are the watchwords because the Deposit schemes aren't keen on greedy landlords and tenants don't like feeling that they are being taken advantage of.

If you are looking for a good book to read over the summer which will also help you get in the Landlord Mind Set try the 3+1 Plan which I've linked to at the foot of this page.