Will Increases To Capital Gains Tax Panic The London Property Market?

The first Labour Budget is on 30^th October.

Rachel Reeves seems to be backtracking on certain issues.

However, it seems likely that Capital Gains Tax (CGT) will increase.

So how will this affect the prime London property market?

Well, there seem to be quite a few misconceptions which you need to be aware of, because CGT liability on property varies quite dramatically:

1. If you are UK resident and you qualify for Principal Private Residence (PPR) relief then there is no CGT.

2. If you own a property as your PPR and then move to another property but keep your original property, there will be some CGT payable if you keep the property for over 9 months. Below is a simple example:

Background:

• Property bought for £1m in November 2012 and occupied as the main residence.
• In March 2020 you begin occupying another property as your main residence, either letting out the original property or just using it occasionally.
• In November 2024 you sell the original property for £2m.

Calculation:

• You owned the property for 12 years. This equates to 48 quarters.
• Of those 48 quarters, you occupied the property as your main residence for 29 quarters.
• Additionally, PPR is always available for the last 9 months of ownership, i.e. 3 quarters.
• PPR therefore applies for 32/48 quarters of the period of ownership
• The gain was £1m (£2m sale price less £1m acquisition price).
• Allowable capital expenditure and sale costs were £100,000.
• So the net taxable gain before PPR was £900,000.
• The PPR proportion of the gain is 32/48 x £900,000 = £600,0000 of the gain is exempt.
• That leaves £300,000 of taxable gain relating to the non-PPR period November 2020 to November 2024.
• 28% x £300,000 = £84,000 of tax payable (assuming no annual allowance of £3,000 available).

(Thank you to Alasdair Wilson at Harbottle & Lewis for providing this example).

If Labour decide to increase CGT to 40% then the tax payable would rise to £120,000 or £36,000 more.

AN IMPORTANT DIFFERENCE

Non-UK residents have only been subject to CGT on residential property since 6 April 2015. Gains before that date are exempt from CGT, i.e. they are rebased to their value at 6 April 2015 – although there are different calculation methods available to the client depending on the market fluctuations.

It is possible that a non-UK resident could claim PPR but this calculation becomes more complex and you would need to seek specialist advice (if you need a recommendation, please email me). However, in many cases, the CGT payable is likely to be low because there have not been significant price increases on many properties in that time.

So, I think it is unlikely that we will see a massive increase in non-resident property owners selling up because they are concerned about CGT.

The people who are probably most concerned will be investors who have owned their properties for some time and have a significant capital gain. Indeed, over the last year there has been a significant number of 1 and 2 bedroom flats come to the market.

This is a basic example of the CGT calculation:

• Property bought for £1m and rented immediately
• Property sold for £2m
• Capital gain = £1m
• Current CGT = 28%

In short, £280,000 would be payable currently and this would rise to £400,000 if CGT is raised to 40%. Please note that this is a very basic example and, in practice, the CGT would probably only be payable on c. £900k as SDLT, estate agent fees, etc. can be deducted from the Capital Gain).

Why does this matter?

There seems to be a belief that an increase in CGT is going to cause a massive fall in property prices. But let me ask you this:

If you owned a rental property that you know you can sell for £2m and your potential CGT liability was going to increase £120k, would you accept an offer on the property that was £120k (or 6%) less than what you think it is worth?

If you definitely wanted or had to sell, then you probably would. BUT, I expect for most people they won’t be rushing to put their property on the market, especially those who feel that prices will increase over the next few years. And this is assuming that anyone facing the increase in CGT has time to do anything about it, i.e. if Labour decide to implement it immediately.

This does not mean that there won’t be individual cases where there will be an opportunity to buy well, but I think it is highly unlikely that an increase in CGT is going to cause a significant shift in prices across the market as a whole.

Please also be very careful about being attracted by properties where a significant discount is possible. Because many of the ex-rental properties being sold are decidedly average if not downright poor, so they are unlikely to perform well in terms of price in the future.

As Warren Buffett has said:

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

The same is true about property because Best in Breed properties will increase in value far more over time. And if you can buy one of these at a wonderful price, then even better!

If you would like to discover how to do this, you can request a complimentary copy of my book, The Insider’s Guide To Acquiring £1m to £100m Property in London, by clicking here.