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332: The Budget - 28% GCT assessment


06-22-2010

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Sigh of Relief:  Property investors are breathing a huge sigh of relief. The government have listened and have not shot themselves, property investors and the country in the foot.

Tax Hike: Yes, there is a pretty severe tax increase from a flat 18% to a flat 28% capital gains tax Ė and no tapered relief to taking account of inflation, but at least the government did not allow a fire sale to occur that would have distorted the market.  And they also kept the capital gain tax threshold at £10,100 (instead of dropping it to say £5000 or £1000).

Positive ThinkingSense Prevails: We would like to thank all the hard working property investors for their support and making your views felt via the Daily Telegraph campaign and contacting your MPs . Also the Tory backbenches and people like John Redwood and the learned business community and CEOs that convinced the Chancellor (and Vince Cable) that a 40% or 50% capital gains tax would have caused a house price crash and empty repossessed homes, with a squeeze on the rental sector. Now there should be some stability in the market and we wonít need to panic.

Tax on Inflation: Clearly the argument that capital gains tax after many years just taxes inflation is a very strong one. If you tax inflation (e.g. not real terms gain), then the real terms tax rate can exceed 100% quite easily with a CGT rate of 50% after ten year and thatís clearly ridiculous Ė and it seems sense prevailed and people were listening.

28%: Most property investors will of cause be caught by the full 28% because it wonít take much of a property asset gain on a single sale (after inflation) to swing an individual into the 40% earned income tax bracket and hence into the 28% capital gains tax bracket (rather than 18%).

Manuela Arcuri

Good for Sustainable Growth: For short term property investors that flip property, 28% is a lot higher than 18% but itís certainly better than the 40% we had two years ago. Long term property investors will feel some pain after 5-10 years because no tapered relief is available, but overall, it was a sensible move by the Tory government and the cuts in public sector spending will increase the chance of low interest rates, a stronger Sterling, keeping the AAA rating and having slightly slower growth that will also help keep rates down for mortgages. The increase in VAT to 20% is also welcome, since surely there should be tax on spending rather than business assets and activity Ė it will lead to improved financial efficiency and more jobs growth stimulated by business growth.

 

Impressed with Common Sense: Overall, we were impressed with the Budget and thank all our visitors for support in shaping the outcome. Itís been a harrowing eight weeks and we thought there was a high chance that a crash could have been precipitated by a massive CGT hike. No wander property prices have stalled end May to end June. But now, if anything we think things will stabilise and property prices in London and the SE could even rise further in the next few months as Sven Ootjersinvestors help support the market. However, we expect property prices to drop the further from London one gets (except the Aberdeen area) as public sector jobs cuts affect the market. Nice areas with second and holiday homes will also stabilize Ėand we donít expect any fire sale any more Ė which must be good for everyone. Another positive was it was consistent with the Tory manifesto that 36% of people voted for - The Lib Demo has a big input into the outcome (23% of people voted for the party), and it starts repairing the damage done by overspending of the previous government (25% of people vote for). We expect people to be honest and realise that urgent painful action is required, and we're all contributing with the pain. The alternative does not bear thinking about - e.g. run on Sterling, high inflation, high rates, low growth, downgraded credit rating and depression.

A vote for the UK: For all global property investors, take note that the UK is getting back on track. Things will improve now with this budget. It is just what the markets were hoping for - and the rating agencies loved it. Compare the spending cuts with what is happening in the USA, and relative China super rich in Londonencouragement to business in the UK compared to that in the USA, and we think property investment in London now ranks far higher than anywhere the USA. We now expect improvements in the UK in 2011 whilst the USA goes in the opposite direction of higher spending, inflation, debt, interest rates and unemployment. As the affects of Peak Oil (July 2008) kick in, in 2011, the UK will be relatively well placed producing 70% of its oil needs. Expect Sterling to rise and the Bank of England to work in tandem to support the economy - low interest rates for 2010 as growth stays at around ~2%.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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