Capital Gains Tax fears may impact property prices

Average house prices in the UK rose by 0.5 per cent in May to GBP169,162, according to Nationwide's latest figures. But the building society said recent rises in house prices would be hit by a greater supply of properties coming onto the market if the Government increases the rate of capital gains tax (CGT).

CGT is applied to sales of assets including second homes and buy-to-let properties and the Government wants to raise it from 18 per cent to a rate which is closer to income tax - at 40 per cent or even 50 per cent.

Property investors and second home owners are bracing themselves for potential changes to CGT by the coalition Government - with some people eager to sell their assets ahead of any changes in legislation to avoid the tax. Precise details about CGT will not be known until the emergency budget announcement by the Government on 22 June.

Buy to let and other landlords now own more than one in seven British homes or 15 per cent of the property in the private sector, according to Nationwide.

Regarding what the short term impact will be on the housing market and house prices, Nationwide’s chief economist Martin Gahbauer said: "The key question is around the timing and implementation of any CGT increase."

He continued: "If there is a significant time lag between the announcement of the increase and its actual implementation, then some second home owners and buy to let landlords may decide to sell in advance of the higher rate being introduced."

Guhbauer said: "Such a development could lead the supply-demand balance to shift more in favour of buyers and relieve the current upward pressure on house prices. However, it is difficult to know with any precision how many people would bring forward a decision to sell."

The economist argued that the incentive to try to beat the higher tax rate is most pressing for those who have owned their properties for a relatively long period of time and therefore have relatively large unrealised gains.

"Conversely," he added, "those who bought their second homes or investment property within the last five years have little incentive to sell early in order to beat the tax change. House prices have only risen back to their mid-2006 level and the first GBP10,100 of capital gains is currently tax free."