Buy-to-let investors will be hit by planned capital gains tax rise

The new coalition government has outlined plans to increase capital gains tax (CGT) for non-business assets from 18 per cent to, perhaps, 40 or even 50 per cent – and this could affect buy-to-let investors who own properties standing at a gain.

The expected rise in CGT – a key plank of the Liberal Democrats’ election manifesto – will particularly hit buy-to-let landlords and property investors. This is because when a property is sold, the entire gain made on that property is potentially liable for CGT in that tax year. Consequently, there is likely to be a sudden rise in landlords and investors selling their properties in the coming weeks, before the impending tax rise.

At the time of writing, it is not known when the CGT rise will take effect, though it is likely to be in April 2011. There is, however, the possibility that it will be brought in immediately following next month’s emergency budget.

The full details of the change have yet to be decided; in fact all the Government has said is that it “seeks to agree a detailed agreement” on raising CGT, so that it falls in line with income tax rates. However, with the proposed change only affecting “non-business” assets, the key issue will be how the Government defines “business” in the forthcoming legislation. The National Landlords Association has called on the Government to treat buy-to-let property as a business asset, so that investors ‘escape’ the rise.

Landlords and investors who have been thinking about disposing of their property portfolios would be advised to consider whether they should act sooner rather than later, so that they benefit from the current 18 per cent CGT rate. However, it may not always be practical (or desirable) to sell a property or portfolio on the open market in such a short timeframe; aside from a lack of purchasers, property values are still depressed. With careful tax planning it may, however, be possible to dispose of the asset and trigger a taxable gain without making such a sale. If this is of interest, please contact our tax department or your usual Matthew Arnold & Baldwin contact.

In the meantime, we, and the property industry as a whole, await the Government’s emergency budget with great interest.