General New: Tax change prompts a rush to sell

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Tax change prompts a rush to sell
The Government’s decision to raise capital gains tax on second homes to 40 per cent has alarmed many owners: Reports Report prepared by Leonard Holihan

If success in the property market is all about timing, buy-to-let investors have reason to feel smug. News that the Government had cast around for a means to pay off the national overdraft and settled on capital gains tax (CGT) came as a shock. But that surprise was accompanied by a convenient welter of reports showing vast demand-driven increases in the cost of renting.

These statistics from the past few months — rents up 11 per cent in a year, according to the London agent Ludlow Thompson, or up 2.7 per cent around the country in only three months, according to Findaproperty.com — have helped to illustrate what kind of rises might follow if landlords, who provide three million homes for private rent according to the Association of Residential Lettings Agents, are forced out of the sector.

Now, with a new government in place, the owners of second homes are worried. There are thought to be only about 250,000 of them, but attention has turned to how they might be expected to pay a larger share towards balancing the country’s books. Claims that they bring wealth into remote communities have palled as locals point to seaside cottages shut up for the winter and complain of being priced out of the market. And, unlike landlords, second-home owners boast no industry groups ready to mobilise.

Thus these owners, who have been riding the fashion for holidays at home, appear likely to see their capital gains liabilities jump from 18 per cent to 40 per cent, in line with income tax, in the emergency Budget next month. Alex Thompson, of Winkworth, explains: “A property worth £1 million now, that was purchased for £500,000, might have a maximum tax liability of £80,000. Were CGT to become one’s marginal income rate, this could become as high as £250,000.”

Unusually, the policy is expected to be introduced with immediate effect or — some fear — backdated to the start of this financial year. There is no suggestion that there will be a provision for owners who, in moving up the ladder because of a new job or a growing family, have been turned into reluctant landlords by a market that continues to underperform in their area.

Already agents are reporting fierce activity. Many such owners are hoping to take advantage of the relatively healthy market at present — but the majority are desperate to realise their gains while they can keep them largely out of the taxman’s grasp. As Charlie Bubear, a Savills agent, says: “With some advisers suggesting that the change will be effective from midnight on June 22, that’s now the clear deadline focusing the minds of a few sellers.”

Bubear’s colleague in Henley-on-Thames, Charles Elsmore-Wickens, says that “within hours” of the Government’s announcement a client was on the phone to discuss bringing forward plans to sell a second home. Jonathan Cunliffe, his opposite number in Cornwall, also reports a flurry of anxious inquiries.

A vast sell-off could destabilise the recovery in coastal hotspots and pretty rural locations, where up to 50 per cent of buyers in upper price ranges are purchasing a holiday home. Already the election has taken a toll, with the number of sellers up but the number of solvent buyers down.

But those who think that their city home can withstand a CGT-related flood of homes for sale should beware: two of the areas with the greatest concentration of second homes are the City of London (24.2 per cent) and Westminster (6 per cent). Of course, the rich are often well advised. As Mr Bubear says: “At the top end of the market, tax planning is in place as a matter of course, with many properties owned by offshore companies and trusts, or already held in children’s names.” But there remain many postcodes where second-home owners are not the international wealthy.

Any aspiring buyers who are hoping that a sell-off would benefit them are likely to be disappointed. Halifax, the lender, contends today that affordability is at its best for seven years and reveals in a report that mortgage payments as a percentage of disposable income have dropped from 48 per cent in 2007 to 31 per cent now, well below the 37 per cent long-term average. But few aspiring buyers would believe that conditions are so favourable, given the vast deposits required to climb on the ladder.

A sell-off of second homes may release a trickle of homes in some places. But, as is shown by the sale at auction next week of three apartments in South Hams in Devon — one of the most highly sought-after boroughs in the country — who is to say that they will be the type and in the areas required? Flete House’s location on the edge of Dartmoor is within reach of Salcombe — but the buyer must be at least 50 to be eligible to move in.

The resulting instability in the market as sellers look for quick, easy exits will do little to convince lenders that the downturn is over and that first-time buyers are a better bet than the cash-rich investors or affluent downsizers who, until this week, were best placed to purchase homes in the nicest locations in the UK.

Report prepared by Leonard Holihan