331: Blind panic could start 22 June - Crazy Capital Gain Tax Plans
Bad Day: The worst day in UK property investment history could be Tuesday 22nd 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%. Thats 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. Thats 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. Thats 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. Its crazy. No-one in the right mind should be investing. They should be monetizing selling up bailing out - its 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.
Landlord Offer Business Services: The governments have failed to build properties to rent or provide social housing and hence have relied on private landlords to provide this service and fill the gap. If they are then penalised for ten years hard work by a tax that swipes half their asset value in a stroke after paying inflated mortgage costs to help bail the banks out, and tax on after taxed earned income and on inflation it will be the most unjust idiotic tax you have ever seen in the history of property in the whole world. Period. Its equivalent to seizing half your property portfolio and that was not announced in the Tory manifesto a few weeks ago. No-one voted for this. Its idiotic and crazy.
90% Tax is Crazy for Long Term Investment: It would be a 90% tax on property the highest in the world. Yes, the highest tax in the world. It would lead to a house price meltdown and crisis of possible epic proportions wait and see if this draconian tax measure happens this is our prediction, unfortunately for everyone in the country. Tax revenues would crash. Studies support this high CGT leads to lower revenues.
This is the last chance for the government to put tapered relief to a 10% rate after 10 years for long term investors. If flat 40% (or even 50%) is introduced it will lead to panic. Banks could crash. Jobs will be lost. As for voters they will leave in droves.
Blind panic could start next week 2pm on Tuesday 22 June 2010.
PropertyInvesting.net comment 2 July: Thank goodness common sense prevailed - the impact was not good, but it could have been a whole lot worse. For our assessment of the CGT increase from 18% to 28%, click here