PropertyInvesting.net: Property Investment Special Reports

331: Blind panic could start 22 June - Crazy Capital Gain Tax Plans

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PropertyInvesting.net team                      

Bad Day: The worst day in UK property investment history could be Tuesday 22^nd June – when Chancellor Osbourne stands up and announces the result of the Emergency Budget – and capital gains tax increases.

Tax Rise Already: Remember we used to get tapered relief to 10%, then Labour put in place a flat 18% tax, an 80% tax increase for long term investors, two years ago. This set back long term investors significantly. But far worse looks just around the corner – a left wing socialist tax from a supposedly Tory Government – the person behind this is Vince Cable (ex-Labour MP for Hillhead Glasgow).

House Price Crash? If the Coalition want to ruin the country, all they need to do is have no tapered relief, increase capital gains tax to 40% and announce this begins 5 April 2011. This will precipitate a massive house price crash like you have never seen and a run on the banks – the whole UK economy will implode. The reason is that half buy-to-let investors well sell up in a hurry. Already it is almost impossible to get finance for properties. Rents are going up. Shortages of properties persist despite a recession. And the flood of properties on the market with tenants out on the streets would cause chaos. As negative equity hit home, repossessions would shoot up, banks would get into more trouble, there would not be enough money to bail them out, and the whole economy would meltdown.

The is a real possibility, the Coalition will shoot everyone in the foot by going ahead with this crazy tax proposal from the far left wing of the Liberal-Democrat party. Forget about whether it is “fair” or it, it would be suicidal.

Highest Tax in the World: Just consider the numbers – for anyone that might still think it was a good idea to have a flat tax at 40% over a ten year period.

Firstly, investors are taxed at 40% (or more if national insurance is considered or bonus tax is considered). Even if they are low rate 20% taxed, they then pay VAT at 20%. Then they use whatever remaining disposable cash income and put into property. They borrow money at 6% when the base rate is 0.5%. That’s a gigantic and unprecedented 5.5% over the base bank rate. That means they pay an equivalent bank bailout tax of £5500 a year on a mortgage of £100,000!

Then we have inflation of 3% a year – compounded over ten years. That’s about 50%. So then the government are proposing to tax an increase in non inflation adjusted asset value at rates of 40% or 50% after a ten year period! That means they are taxing inflation. That means they are ignoring the 5.5% equivalent tax buy to let investors are paying on finance. That means they are ignoring the fact that buy to let investors have already paid 40% earning income tax, VAT, national insurance. That’s a tax on a tax on a tax on inflation. That has to be over 90% tax rate. That stupid, crazy, naive.

Massive Risk No Return: Just ask yourself, why should anyone risk 100% of their after tax cash savings on property when the downside is quite easily a 100% loss or more (negative equity and bankruptcy), and all for a 10% profits after ten years – 1% return each year with 100% exposure on your cash. It’s crazy. No-one in the right mind should be investing. They should be monetizing – selling up – bailing out - it’s simple.

So government please be warned, property investors are not stupid. They are financially literate and look at risk, return, exposure, time, value increase, tax, tax on tax and the whole equation. They WILL sell up fast, if there is:

·         No significant tapered relief down to say 10% after ten years

·         If capital gains tax rise far above 18%

·         They are given a window to sell – “wash their properties of capital gains” before 5 April 2011.

This is the last plea so that some sort of sanity should start – buy to let investors are entrepreneurs, business people, it is a business – and they should not be treated like a second home or holiday home owners. They provide a much needed service to millions of renters, who cannot afford to own a property – many cannot raise finance because they are from overseas or are just start out in employment or are students or have no job. Landlords are on call 24/7 to solve problems and provide this service – long term investors providing this service over many years - they should not be treated like someone who is trying to make a fast buck or someone who is doing up a second home also for a fast buck.