Tax rise may hit buy-to-let revival

Published 19th May 2010

Capital gains increase comes as new landlord deals emerge


The Government’s plans to raise capital gains tax (CGT) from 18 per cent to up to 40 per cent on second homes came just as confidence appeared to be returning to the buy-to-let market.

Last week, The Mortgage Works, part of Nationwide, launched its first buy-to-let deal requiring only a 20 per cent deposit — previously, 25 per cent was needed.

Aldermore and Paragon are also planning to launch buy-to-let deals. Research by Datamonitor, an analyst, said buy-to-let lending could increase by more than 230 per cent in the next three years to £26.1 billion.

For the moment, however, lending remains moribund. The Council of Mortgage Lenders said the number of buy-to-let loans fell 15 per cent to 22,000 in the first three months of 2010. Over the same time, the value of lending also declined, by 12 per cent to £2.1 billion.

Experts are also worried that higher CGT rates will cause a glut of sales, lowering prices. Lucian Cook at Savills Private Finance, said: “We received inquiries within hours of it becoming clear higher CGT would be introduced.”

Ed Stansfield at Capital Economics, the consultancy, said: “We are not convinced that demand for buy-to-let mortgages will recover quickly. Not only is there considerable uncertainty about the outlook for house prices but the news that capital gains tax is to be raised sharply will hardly encourage prospective new landlords. The outlook for rental value growth is lukewarm.”

So should I sell?

Yes, but only if you were going to sell anyway. Chris Norris at the National Landlords Association said: “If you were thinking of selling up in the next year or 18 months, it would make sense for you to bring this forward.” If you plan to sell later than this, the benefits of long-term house price rises may outweigh the pain of any additional tax you would have to pay.

And what if I was thinking of buying?

It may be worth holding off for a few months to see if prices fall following the expected rush to sell. Daoud Fakhri at Datamonitor said: “I expect there to be some panic selling, which may affect prices.” However, Stephen Ludlow of ludlowthompson.com, a lettings agent, said CGT was at 40 per cent for some people before April 2008. “This didn’t stop a boom in the buy-to-let market,” he said.

The Association of Residential Letting Agents said rental income is improving. Its latest quarterly report shows average yields on flats rose 0.1 percentage points to 5.1 per cent in the first quarter of this year.

What are the best mortgage deals?

David Hollingworth of L&C Mortgages said most lenders still require that your rent covers at least 125 per cent of your mortgage interest payments on top of other lending criteria, and the best deals are still reserved for those with at least a 30 per cent deposit. Nottingham building society, for example, has a three-year fix at 4.99 per cent with a £1,495 fee. Coventry offers 4.99 per cent on a three-year fix with a £1,050 fee.

For a 40 per cent deposit the Mortgage Works charges 3.14 per cent over Bank rate for three years, so now 3.54 per cent, with a 3.5 per cent fee. It charges 5.99 per cent for two- or three-year fixes with a 2.5 per cent or 3 per cent fee respectively.

Source: ' Times '

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