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Budget: goodbye to buy-to-let?

By Channel 4 News

Updated on 22 June 2010

A change in the capital gains tax regime will certainly shake up Britain's housing market, writes Ben King, but will it raise enough money for it to be justified?

To let sign (Getty)

Britain's entrepreneurs will be watching the coalition's budget with extra special interest. Because the tax they pay on the returns they make from their investments will be rising from 18 per cent to a rate in line which income tax - which is 40 per cent for many, or even 50 per cent for higher earners.
 
This is capital gains tax, tax levied on the sale of assets, such as shares in companies, or real estate.

Founders of businesses are looking nervously at this, as someone who spent 10 years building up a company may face massively higher taxes when they come to sell it. But entrepreneurs have enjoyed substantial reliefs from this tax in the past - and it's thought unlikely that the coalition government would impose hefty taxes on a group of individuals who they have identified as crucial to the future of Britain's economy.
 
Buy-to-let landlords, on the other hand, are also likely to be hit, as they pay capital gains tax on any profit they make when they sell a house. (Primary residences are excluded).
 
They don't enjoy such a rosy political reputation. They have been blamed for driving up the prices of flats and small houses, and thus forcing first-time buyers from the market. So they may be hit hard by this tax increase.
 
Some estate agents, such as Felicity J Lord in London, say that they have seen a 25 per cent increase in the number of flats for sale, which they partly attribute to fear over capital gains tax changes - as investors seek to cash in on their property portfolio before the tax rise is imposed.

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A flood of new property for sale will be welcomed by first-time buyers - especially if it is matched by a fall in prices.
 
In Birmingham however, estate agent Philip Jackson of Maguire Jackson feels the withdrawal of rental investors who own many of the city centre's flats could hurt the regeneration of the city centre.
 
"Perhaps as much as 60 per cent of Birmingham’s 13,000 city apartments are held by investors," he said.

"Whilst they are receiving good rental income they may become reticent about selling or indeed buying further in the future or certainly this government term. This could have an impact on the restoration of our city centres as places to live and work."
 
But though house price inflation has been a constant over the past decade, it's by no means certain that house prices will continue to rise - meaning that there could be fewer capital gains for the government to tax. Investors could turn their attention to the rental income on their properties instead, buying flats to hold rather than sell, and borrowing heavily to fund further expansion.
 
Property speculators who make their money renovating dilapidated houses or repossessed homes will find the business much less lucrative - and could quit the market altogether.
 
The effects will be different in different areas, but a change in the capital gains tax regime will certainly shake up Britain's housing market.

But will the money raised for the government be enough to justify the uncertainty and disruption?

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