Emergency Budget 2010: Property Industry's Response

Chancellor George Osborne unveiled the largest package of tax increases and spending cuts in a generation, but what does the housing industry think of today's announcements?

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Melanie Bien, director of independent mortgage broker Private Finance, said: "The increase in capital gains tax was expected but much more modest than feared. With rumours flying around of an increase to 40 or even 50%, it looks as though the Chancellor bottled it in the face of opposition from backbench MPs and traditional Conservative voters.

"With higher-rate taxpayers paying 28% from midnight, those who rushed to sell their second homes and buy-to-let properties ahead of the Emergency Budget showed great foresight.

"However, while an increase in Capital Gain Tax [CGT] to 40% or 50% was not realised, the lack of taper relief is a serious mistake. Those who invest in property over the longer term, perhaps to supplement retirement income, will be unfairly penalised when they come to sell their assets."

Liam Bailey, head of Knight Frank residential research, commented: "CGT was the main story, as the proposed increase was heavily trailed in advance. In reality the rise to 28% for high-rate tax payers is a non-issue for the housing market.

"The rise is coming into play overnight - so there will be no sudden sell-off of second homes or investment properties. The new rate takes us back to a similar rate to where we were under the pre-2008 rules, when taper relief was able to reduce a 40% headline rate of CGT to 24%.

"With higher-rate CGT at 28% the argument for property investment still looks strong, and capital gains still compare very favourably with income tax at 40%.

"The other issue of note is that with strong GDP growth forecasts for 2011 and 2012 - the inference is that the Bank of England will be encouraged to maintain a very loose monetary policy for longer than recently expected, suggesting interest rates at current levels could be maintained for longer.

"This would underpin house prices and also contribute to ongoing low supply in the market."

Jennet Siebrits, head of residential research at CB Richard Ellis, said: "We are pleased that the increase in CGT will take effect immediately, as it will ensure that there is not a sudden rush to sell off assets to avoid the higher rate. Second homes and buy-to-let properties only make up a small proportion of the UK housing market so we were not talking about vast quantities of homes flooding the market, but there was some concern that this could cause further price falls and undo the progress we have made so far."

Liz Peace, chief executive of the British Property Federation, said: "Housebuilders will welcome the fact that they have avoided a VAT rise, despite the LIbDem manifesto suggesting it could have been a possibility. Doing this would have been disastrous for the housing market. However, the VAT hike will put more pressure on retailers and with 12.6pc of shops standing empty, we could see more damage done to the high street. What this means for landlords of shops is that they will see further downward pressure on rents, which will mean less cash for new development and investment in deprived areas."

Phil Westerman, head of construction at Grant Thornton, said: "The tax and VAT hike announced today will add to the distress of an already fragile recovery in the construction sector. As consumer now face an increase to their tax bill and a rise in VAT, this will undoubtedly lead to a fall in the confidence they need to make larger scale purchases. Many will question if now is the right time to buy, if they have the funds to do so and if their jobs are secure.

"Another fear of a VAT rise is that it will lead to more cash strapped consumers resorting to cash-in-hand payments to builder for home improvements to avoid paying a higher rate of VAT. This is a practice that can only lead to the unfortunate promotion of a cowboy culture, which we certainly don't want to see increase.

"The past few years has seen the construction sector experience a tumultuous period where it witnessed falls in volumes and prices, and rises in redundancies and business failures. With public sector spending cuts well on the way, it will mean that many construction contracts with larger contractors - including high value PFI agreements for schools, roads and hospitals - will be abolished.

"Given that the majority of public sector construction contracts are with bigger players, smaller building companies will have a headache as they see larger builders vying for a slice of the cake they would not normally touch."

Peter Rollings, managing director of estate agent Marsh & Parsons, said: "The rise in Capital Gains Tax has been on the cards since the coalition government came to power, but it is a relief that it has not been introduced at the 40 or 50% level and that it has been introduced immediately. Failure to do so would undoubtedly have 'skewed' the market. The market now knows where it stands and I don't believe it will curtail the investment decisions of those wanting to invest in the London property market.

"In London, there is incredibly strong demand for rented accommodation, particularly from young professionals and international workers who prefer the flexibility of renting. In May, almost one in five purchases (19%) were made by investors in central London and we must avoid unfavourable conditions that discourage investment. It is essential that we maintain a healthy and viable private rented sector in the capital, which caters for the housing needs of the whole population."

Dominic Agace, CEO of M Winkworth commented: "The immediate enforcement of the increased CGT rate at midnight tonight is a welcome move as this heads off any rush to sell properties by those trying to beat future deadlines. Flooding the sales market with an oversupply of property would put a downward pressure on prices, hindering the recovery of an already vulnerable housing market.

"It's worth remembering that just over two years ago, CGT was set at ‘up to 40%' until Labour introduced a rate of 18%. So, this middle ground is unlikely to have a dramatic adverse effect on the market, as the returns on property are historically much greater than those achieved through alternative asset classes and it will remain an appealing investment."

Karelia Scott-Daniels, director of Mayfair based Manse & Garret Property Search, said: "It could have been worse, but the deafening silence on stamp duty is disappointing given Tory election pledges, however the capital gains tax increase may help stabilise house prices as some investors shelve plans to sell.

"The 5% top rate of stamp duty for homes over £1m introduced by Alistair Darling in March and due to come into force next year, hasn't been brought forward but neither has it been scrapped. Neither has there been any more on the raising of the stamp duty threshold to £250,000 which was a Tory election pledge which seemingly disappeared under the coalition government and unfairly penalises first time buyers living in London and the South East.

"The increase in capital gains tax from midnight tonight will be a blow to many small investors who have put their properties on the market in recent weeks to take advantage of relatively stable pricing ahead of a possible double dip recession next year.

David Adams, Chesterton Humberts' head of Residential, commented: "This is a brilliant budget for UK Inc. The Chancellor's evidence of fiscal responsibility will help firm the UK pound and calm concerns over potential for a double dip recession.

"Prime property in London and the South East and South West should see now see stable prices while the effect on northern areas with high public sector employment is less rosy. Some asking prices will need to be reduced in the south, but this is simply because of agent over pricing during the first half of the year when property was in short supply.

"Housebuilders should be rejoicing as there was a clear commitment to infrastructure and new build homes will remain exempt from VAT. On the other hand, second hand homeowners will now pay even more dearly for essential repairs and alterations, which will impact those seeking to retrofit their homes to reduce their carbon footprint."

Michael Coogan director general of the Council of Mortgage Lenders commented: "We knew today's Budget would be hard-hitting across the piece, so it is no surprise that housing has not escaped. We understand the tough choices that the government has to make - but obviously that does not mean they are attractive.

"In a world of imperfect choices, steps that help the economy to recover and help to maintain mortgage rates at affordable levels for most people are the measures that will underpin a healthy housing market in the long term. But in the short term pain is likely, as the effect of tax rises on household finances dampens the already fragile recovery in house-buyers' confidence, housebuilding is affected, and support for housing costs across all tenures is curtailed.

"In housing terms this may be the "age of aspiration" as the housing minister said recently, but against an austere backdrop there is a long way to go before the supply of housing, or the ability of would-be home-owners to achieve their aspiration, are likely to show any significant pickup."

Tony Bernstein, tax partner at HW Fisher & Company chartered accountants, said: "The increase in CGT from 18% to 28% will be extremely unpopular with people who have held investment assets for many years. Any sale proceeds will reflect a high degree of inflation, which is now being taxed at 28%, rather than just taxing the real gain itself.

"Despite increasing the rate of CGT to 28%, there is still a sizeable differential between 28% and the higher rates of income tax. Therefore, there remains a benefit for certain individuals to realise gains rather than generate income.

"On the surface, it appears that the 28% rate will only affect higher earners whereas, in reality, people on lower incomes could also easily be caught by it. The 18% CGT rate for people on basic rate tax will increase to 28% if the gain, when added to their income, pushes them over the threshold into the higher rates of tax.

"[On property] The retention of the furnished holiday letting rules will be a relief to many. The previously announced extension to properties in Europe means that a greater number of people will now benefit from the preferential tax treatment these properties enjoy."
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Kate Faulkner of Designs on property said: "The VAT rise may help bring forward renovation projects, but will increase sellers and buyers costs next year and also costs for landlords running their property portfolios.

"The CGT hike is unexpectedly kind! Still less than the tapered relief system bar the 18% and clearly protects ‘mum and pop' investors with one to three properties on standard income tax. For higher tax payers, although they'll pay more, the increased tax bill is likely to be offset by increased rents and potential property prices if they've invested well (reduced stock from coalition policies is likely to push up property prices) and with leveraging it still makes investing in property a sensible decision.

"What may impact though is housing benefit restrictions. This will potentially hurt landlords potentially in the private sector supporting local authorities who do not have the property stock to house people."

David Smith, senior partner at estate agents Carter Jonas, said: "The rise in CGT is unlikely to have a detrimental effect on a property market that is still in the early stages of a recovery.

"Although tax rises are never good news, what the Government has achieved by announcing an increase in CGT immediately, is avoided panic selling by landlords and people with second homes, which could have seen the market flooded with properties as investors desperately tried to sell before the higher rate tax kicked in.

"Now investors will have to take a more measured and longer term view if they're still planning to reduce the size of their property portfolios."

"For the property market as a whole, the Government's decision to leave in place, for the time being, stamp duty exemption on properties up to £250,000 for first time buyers, will be welcomed."

Jonathan Moore, director of Easyroommate.co.uk, commented: "House prices have continued their upwards trajectory in 2010, and thousands of buyers cannot afford to get a foot on the housing ladder as a result. With potential public sector job losses on the way in the autumn and the inevitable negative impact the VAT hike will have on businesses, the affordability gap is only set to worsen. We will see increasing demand for rented accommodation.

"The good news is that, while a Capital Gains Tax increases may be bad news for many professional landlords, live-in landlords have emerged unscathed. In fact, they should see an increase in tenant demand in the short-term. With social housing likely to be in the firing line for future funding cuts, and investment in the private rented sector via buy-to-let likely to feel the effects of a higher Capital Gains tax, flatsharing will play an vital role in the housing market, providing affordable accommodation for the UK's growing population."

Darrin Carter, director of Carter Agents, said: "The CGT rise may stop some landlords from selling, who may decide to continue letting, while the VAT increase will have no effect on the market."

Tim Hawe, head of property at George F. White estate agents, commented: "Capital Gains tax rises were expected to be much higher. This increase, while not ideal, is nowhere the disaster we were expecting and therefore I do not believe it will have a significant impact on the property market.

VAT increase from 17.5 to 20%. Again this was highly predicted and not a measure that will unduly upset the property market."

Trevor Abrahmsohn, founder of Glentree International in North London said: "Given the dire state of the government finances inherited from the previous administration, I think that the effect of today's budget will not be as traumatic as predicted", says Trevor Abrahmsohn, founder of Glentree International.

"The rise in capital gains tax to 28% [for higher earners] is not good news for buy to let landlords, but in the circumstances it is cleverly pitched, since most macro economic observers thought that the rate would be 40%, or at worst 50% in line with the higher rate of income tax. This is the equivalent of "bringing in the lambs!"

Marc Goldberg, head of sales at Hamptons International, said: "By implementing the Capital Gains Tax increase for higher-rate taxpayers from midnight tonight, we can expect a more stable pricing outlook for 2010 without the spike effect on housing stock levels that we predicted, had the changes come into effect in 2011.

"From a housing supply point of view, an immediate Capital Gains Tax increase means demand from property investors looking for short-term capital gains will diminish. Also, owners of investment properties are more likely to hold onto investments for a longer term to benefit from taper relief or future changes to CGT allowances. If this implementation had been delayed until 2011, then we would have seen an immediate rise in new properties coming onto the market, benefiting those looking to purchase by giving a wider selection of properties to choose from."

Laurence Glynne, Partner of West End Specialist estate agency, LDG, said: "The 28% rise in CGT for higher rate tax payers as opposed to the feared 40-50% is good news for investors and the property market in general. It means that anyone holding back from putting their property on the market may consider their options more favourably, not only due to the lower than expected rate, but because they will be encouraged that investment buyers are unlikely to be deterred by the increase.

"Approximately 30% of our property sales last year were to investors, and we don't expect a decline in investment purchases following today's announcement. People have been prepared for the worst for the last few weeks, so this is more of a ‘bruise' than severe muscular damage."

Yolande Barnes, head of residential research at property adviser, Savills, commented: "The limiting of the CGT rate to 28% for upper rate taxpayers is a welcome deviation from the feared 40% or 50%. Also to be welcomed is its introduction from midnight tonight. A delayed or phased introduction would have led to second home owners and investors selling to beat the deadline and might have increased supply, depressing prices.

"For a higher rate taxpayer who bought the average priced home ten years ago, as a second home or investment, and who sells it tomorrow, the changes will mean that they pay an extra £7,500 compared to what they would have paid yesterday. This represents an extra 56% in tax on the £85,000 gain.

"Overall, there are inherent risks in discouraging any type of landlord at this time of growing demand for private renting. There are currently insufficient numbers of corporate investors and fund managers to take up the slack if private individuals withdraw from residential lettings. Compelling ‘pull factors' still need to be put in place as a matter of urgency to attract corporate or institutional investors to the sector and to increase rental supply."

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