Owners of second homes and residential property investors could be in line for a tax hike if the new Conservative-Liberal Democrat coalition Government raises Capital Gains Tax (CGT) from an 18% flat rate to a top rate of 40% or even 50%. Mr Cameron has defended his bowing to Lib Dem demands for higher taxes, hitting those who have profited from a booming property market, stating last week that ‘a second home is not necessarily a splendid investment for the whole economy’.

Tax experts are already getting a surge of inquiries from concerned second-home owners and buy-to-let landlords about proposed new rates on ‘non-business assets’, including second homes, buy-to-lets and shares, expected to be announced in the emergency budget on June 22.

Jonathan Cunliffe from Savills in Truro has had a number of calls from clients wondering if they should try to sell their second homes quickly ahead of any changes. ‘These are people who bought some time ago, say at £500,000, and now are sitting on properties worth about £1.5 million. A 40%-50% hit on £1 million of capital gains is a lot of tax,’ he points out.

Mr Cunliffe adds that there is a great deal of uncertainty about how and when any changes will be implemented, with some fearing it could be backdated to cover this tax year, although most analysts believe it’s more likely to be introduced from April 2011.

Liam Bailey, head of Knight Frank’s residential research team, says there will undoubtedly be potential buyers who will now think twice about their purchases. ‘However, nearly three-quarters of second-home buyers purchase with the intention of retiring to the property in the future. There-
fore, for the majority, the CGT changes are an irrelevance.’

Finders Keepers, an independent letting agency in Oxfordshire, has witnessed a rush of landlords keen to sell off their buy-to-let properties ahead of CGT modifications that could raise £4.1 billion for the Treasury. Dan Channer, Finders Keepers’ commercial director, believes a ‘fire sale’ of property could have a devastating effect on the rentals market, leading to higher rents and limited selection for tenants.

The proposed CGT increase might be the catalyst to get us to focus on alternative investment options, property finder Tom Hudson from Middleton Advisors suggests. Although most of his clients are moving to the country to be near good schools and won’t be deterred by CGT rises, some might ask: ‘Is it the right time to invest in a second home in the UK, a villa in France or a painting?’ Yet there are ways to reduce tax bills.

Lucian Cook, director of Savills residential research, suggests owners who want to pass investment or a second home on to the next generation might look to do so within this tax year, ‘thus incurring Capital Gains Tax at the existing rate, rather than Inheritance Tax at a potentially far higher rate at a later date’. If many gains will be taxed at the highest Income Tax rate, then splitting ownership would help if one spouse has modest amounts of income and the other a substantial income paying the top rate, advises Richard Mannion, national tax director at Smith & Williamson. ‘Business assets are likely to be protected from tax increases, so a property rented out as a furnished holiday home might escape CGT rises, but this is by no means certain.’

Property lawyer Fiona Graham from Boodle Hatfield thinks that selling your property to a trust you’ve set up could be one way of reducing the tax burden, although you could have upfront Inheritance Tax to pay. ‘You can also consider making your holiday home your prime residence for a short period of time to get the last three years of ownership CGT-free. Then you can flip it back later.’ This was a ruse used by many of our MPs prior to the expenses scandal and wasn’t resoundingly popular with the electorate-but it’s perfectly legitimate tax planning, according to Mrs Graham.

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