Autumn Statement: Halving CGT allowance may prove rash

Contrary to general expectations, the Chancellor has targeted domestic as well as foreign landlords in his Autumn Statement. Currently, a rental property that has at any time been the owner’s main residence is exempt from capital gains tax (CGT) for the final three years of ownership. CGT is calculated on the number of years of ownership, so decreasing the number of ‘tax-free’ years will increase the amount of CGT to be paid. Mr Osborne has cut the three years in half to 18 months; this will come into effect from April 2014. Meanwhile, as expected, foreign investors will have to pay (CGT) on the profits of any sale of a property that is not the owner’s main home from April 2015. Previously only UK residents had to pay CGT on such profits.

The halving of the CGT allowance is a significant change. While all landlords have the opportunity to take advantage of it, the changes will most affect those the allowance is designed to help: accidental landlords who cannot sell their properties. Rentify understands that tough decisions have to be made across the board for everyone’s best interests and there will be many outside the BTL world who will welcome the changes. But many of these people do not realise rental yields are not huge for landlords (around 5%) even while demand remains high, so there is a worry that these changes may lead to increased rents and drive some landlords to sell up. After all, the capital growth of properties will take a hit from the new measures. The government should be nurturing PRS, which does so much to help alleviate the housing shortage.

Perhaps another feature of the Autumn Statement has emboldened the Chancellor to take this step. More money is being put into building houses, along with £1bn in loans to support this. The government has put a lot of stock in getting first-time buyers on the ladder but it may prove unwise to have also taken a shot at PRS, a useful, profitable and sustainable section of the housing market, especially given the current housing situation. It also seems strange and unfair that the measure should come in to force an entire year before foreign investors start paying CGT: not encouraging for UK landlords working hard to turn a profit.

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