Recently announced proposals by the new Chancellor of the Exchequer to increase the rate at which capital gains tax (CGT) is to be applied (from 18% to 40% or even 50%) and bring it back in line with income tax rates, may have raised a few eyebrows. Not least from those who would not typically have expected this sort of action from a Conservative-led government.
The effects on the holiday home and second home insurance market has yet to be determined.
The increases, planned to be announced in the forthcoming emergency budget on June 22, will affect all assets sold which fall into the capital gains category and this typically includes second homes.
So, once the new rate is effective (expected to be April 2011, but it could be immediate), gains from the sale of a second home may be taxed at 40% rather than at 18%.
The basic maths is relatively simple:
If your property cost you £100,000 and you sell it for £200,000 then your gain is £100,000. At a tax rate of 40% you’d pay £40,000 to the taxman. So the net proceeds from your sale are therefore £160,000 (200k-40k).
If you were to sell the same property for the same price prior to the proposed tax increases, then your tax bill would be £18,000 making your proceeds £182,000 (200k-18k).
To beat the tax rises, therefore, buy-to-let and second home owners who were contemplating selling their properties following good capital growth may rush to get them sold before the proposed increase takes effect.
Owners could then theoretically afford to lower prices to make properties more attractive to buyers. A selling price of around £173,000 at the 18% rate of CGT would be enough to realise the £160,000 in the above example.
Timing is key
If the tax rise is to be introduced in April 2011 as some predict, then there may well be a rush of property investors trying to sell before this deadline, flooding the market with second homes.
Prices could well fall and analysts are additionally worried that this in turn could jeopardise the still fragile economic recovery – and specifically the buy to let and second home markets.
If the new rate is introduced immediately, however, there may be little or no chance for holiday home owners to sell their properties quickly and possibly little incentive to put properties onto the market at all.
In the final analysis the timescales for the introduction of any changes to the capital gains tax rate will be the determining factor on the impact on the buy to let market or the second home market. It should be noted that business assets are likely to be protected from tax increases, so a furnished holiday let might escape CGT rises.
All will be revealed in the forthcoming emergency budget on June 22.
Avoiding capital gains tax is not just for MP’s; see how you can avoid capital gains tax with these 10 tips.
