Capital Gains Tax Hike May Disrupt Housing Market

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A leading analyst has raised concerns that many landlords might decide to sell their properties this autumn due to fears of a potential rise in Capital Gains Tax (CGT). This mass sell-off could disrupt the housing market and potentially derail any ongoing recovery. The anxiety among property owners is growing, fueled by speculation about forthcoming changes in tax policy.

Recent commentary from Chancellor Rachel Reeves has added to the uncertainty, with discussions about possible CGT increases in the October budget intensifying. These remarks have contributed to a sense of urgency among landlords, who are worried about the impact of higher tax rates on their investments.

The anticipated rush to sell could result in a significant influx of properties on the market. This increase in supply might slow down price growth and negatively affect the current positive trends in the housing sector. If many landlords act on their concerns and sell off their properties, it could have a serious impact on the overall stability and recovery of the housing market.

Sarah Coles, a personal finance analyst at Hargreaves Lansdown, has indicated that the recent cut in the Bank of England base rate is likely to lead to modest house price growth for the remainder of 2024. While this adjustment may stimulate some improvement in the housing market, Coles cautions that the growth will not match the exceptional booms seen in previous years. She highlights that any potential changes to Capital Gains Tax (CGT) could dampen the extent of this growth.

Coles elaborates on the potential impact of rising CGT, noting that buy-to-let investors are increasingly concerned about the possibility of higher taxes. She explains that if Chancellor Rachel Reeves decides to raise the CGT rate to align with income tax rates, high-rate taxpayers could face a significant increase in their tax liabilities when selling their properties. This adjustment could deter investors from selling or making new purchases, potentially cooling the housing market.

Additionally, Coles underscores the importance of monitoring investor sentiment in light of these developments. The speculation surrounding CGT rises could lead to uncertainty and hesitation among property owners and buyers. This, in turn, might affect the overall market dynamics and limit the potential for substantial house price increases, contributing to a more cautious outlook for the housing sector in the coming months.

There are concerns that some property investors might choose to sell their properties before any potential changes to Capital Gains Tax are implemented. If a significant number of investors decide to exit the market, it could lead to an oversupply of properties for sale, which might push prices down.

Buy-to-let transactions have already seen a sharp decline, dropping by 14% from 224,700 in the 2022/23 period to 193,700 for the year ending June 30, 2024. This data, provided by the chartered accountants and business consultancy Lubbock Fine, is based on government statistics.

The decline in buy-to-let purchases has reached its lowest point since the introduction of the higher stamp duty rate on additional properties in 2016. At its peak, there were 287,200 buy-to-let transactions in the year up to June 2021.

Andy Noton, a partner at Lubbock Fine, comments, “There has been a significant drop in rental property purchases recently.

“Fears that the new Government may increase Capital Gains Tax in the upcoming Budget or impose additional regulations on landlords are leading many to sell their properties and fewer to enter the market.”

“However, a further decline in mortgage rates could alter this trend. With rents still rising, lower finance costs could make rental investments more attractive for landlords.”