Capital gains tax will deter new investors - RICS emergency budget submission (UK)

As part of its emergency budget submission, RICS has concluded that a rise in the rate of capital gains tax will deter much needed new investment into the private rented sector. RICS has called on the Government to introduce taper relief based on the length of time buy-to-let investments have been owned.

In the May 2010 'RICS Housing Market Survey', an extra question was asked regarding the impact of CGT (capital gains tax) on investors. 72% of chartered surveyors who responded believed that a rise in CGT would deter investors from entering the private rented sector. Only 11% believed it would have no effect. The analysis formed part of the RICS emergency budget submission which also includes key recommendations on public sector asset management and for the construction industry.

The responses were strong across all regions with 100% of surveyors in the West Midlands convinced that CGT would deter investors. This was followed by 82% in London and 72% in Wales. The area with the fewest 'yes' responses was the North West with 58%.

RICS has also called on the Government to ensure that public sector asset cuts are strategic, sustainable and focused, avoiding a damaging 'slash and burn' approach.

Key recommendations include:

• The Government must recognize the lead-in times for change in property, and focus on a strategic plan for major, sustainable running-cost savings, while using market intelligence to seize disposal opportunities
• Continue mapping the total public sector estate to identify and eradicate surplus properties and inefficient space usage, especially where collaboration between agencies will lead to greater efficiency
• Accelerate the development and recognition of asset management skills across government, with professional body and private sector help

In the construction sector RICS has called on the Government to:

• Take advantage of the high multiplier effect in the construction sector resulting from its low reliance on imported materials, extended and varied supply chain, and relatively high labor intensity as a vital engine of economic recovery and long-term growth, by not reducing capital spending below the April 2010 budget figures
• Encourage private sector development finance to complement public sector capital spending by giving further direction to the banking sector

Commenting on Capital Gains Tax, Simon Rubinsohn, RICS chief economist said: "Our research indicates that an increase in the rate of CGT is likely to deter new investors from entering the buy to let market, at a time of acute shortage of affordable accommodation. And while it is unlikely that there will be a near term glut of supply, a 'fire sale' of properties by landlords looking to avoid a higher rate of CGT could if it were to materialize have a significant impact on the fragile improvement in sentiment in the residential sector. In addition, there could well be a drop in the supply of land for housing development. An increase in tax may discourage landowners from putting forward their land for development, which would reduce the number of homes built.

"One way of limiting the damage from lifting the CGT rate is to re-introduce some form of taper relief on income from certain types of asset. With taper relief in place the amount of CGT owed would depend on the length of time the asset has been owned. This would fit with the business model that many people in the private rented sector use, where they own a property for several years before selling it to realize some of the capital value."

Commenting on public sector asset management Mark Goodwin, RICS director of external affairs said: "The massive budget deficit has created a "burning platform" for strategic public sector asset management as a big part of the solution. The danger is that pressure for short-term cuts and quick disposals will not achieve real value and will deplete the pool of professionals capable of delivering the best practice that is out there. RICS is urging the Government to: understand the lead-in times for effective

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