Capital Gains Tax Impact on Markets, Buy to Let Rush to Sell Properties

Personal_Finance / Taxes May 31, 2010 - 05:06 AM GMT

The FTSE is already suffering under the implications of the proposed Capital Gains Tax changes of expectations that the tax will rise from 18% to 40% which has resulted in gains being banked by private investors ahead of the tax hike on 22nd June. However the real hit from the tax hike will be felt not in the stock market but the property market, which hits the large number of buy to let sector investors who rely up on capital gains as an important element in generating total returns.

Therefore expectations are for a surge in buy to let investors rushing to sell ahead of the tax hike, for which they have a very short window of opportunity of 22 days remaining. Another major contributing factor is scrapping of the costly Home Information Packs (HIPS), that has kept supply limited and hence supported house prices. HIPs have now gone and so home owners have no extra cost to bare by putting their homes on the markets which is as illustrated by the property website Rightmove that is seeing a 34% rise in listings.

Of greatest concern is that a tax hike without reintroducing indexation for inflation would destroy the incentive for long-term investing. Therefore the government would be using inflation as a stealth tax to DOUBLE tax long-term investments, especially in the property market into oblivion, where it will become near impossible for an investor to make a gain in real terms. The same applies to stock market investments outside of tax free wrappers such as ISA's and SIPs, as there would be NO INCENTIVE to invest for the long-run.

On top of this there is mounting evidence that raising capital gains tax may actually result in less tax revenue as people are less willing to realise gains i.e. to delay action, whereas a lower tax rate makes investors more likely to realise gains resulting in greater market turnover.

Source: http://www.marketoracle.co.uk/Article19921.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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Comments

Nasir
31 May 10, 15:03

capital gains tax theft

This is what the government loves, taxing the poor and middleclasses, its all about control, statistics prove that 95% of the population will never become wealthy, and these taxes, inflation and other ways of ripping off hardworking citizens are just the tip of the iceberg. 40%/50% capital gains tax if implemented for lower income earners as well as the more well off would just be another nail in the coffin of this government. Labour seem relaxed in opposition just waiting for the inevitable, it may take 5 years but they don't mind. If you sell your property, pay your CGT and then die, you still have to pay inheritance tax on whatevers left, well your inheritants do. Its just appalling how people get pushed and shoved their whole lives and never question well why?

John Spencer
31 May 10, 16:45

CGT

As a first time buyer who works hard for an average salary but still cannot get my foot on the property ladder I can only say one thing: BRING IT ON! A house should be a place to live not a source of income for those who got lucky by purchasing at a time before banks became irresponsible with their lending and drove prices artificially high. Why should my salary which I slog my guts off for be more taxable than an artificial price ceiling? Second home owners are not 'prudent' they are in it for the buck and they know that an economy heavily based on property speculation is coming to an end.

Nadeem_Walayat
31 May 10, 17:40

Government Interference

As with everything, if you peel away the layers you see the hand of government manipulation.

Labour should NEVER have cut the tax to 18% from 40% and also should not have aboloshed indexation. The policy was to help boost the UK housing market in advance of an election.

Second home owners see these homes as pensions, which is related to the fraud they are subjected to if they take out personal pension plans that NEVER live up to expectations, or as we saw with standardlife default on pensions.

My next indepth analysis / ebook will analyse the UK housing market.

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