Debate over plans to increase UK capital gains tax takes hold as wealth managers, real estate agents and financial advisers call for tapered relief

Written by Ray Clancy

Tuesday, 01 June 2010 10:00

Investment in various sectors could be hit by proposals to change capital gains tax in the UK as the debate hots up in the lead up to this month’s emergency budget.

Estate agents are reporting a flurry of activity from owners interested in testing the market, leading wealth managers are warning that investments could decline and others are calling for GCT to be tapers to ease the effects on markets.

According to City wealth managers Saunderson House unless the Government takes a softer approach, investment in risky equities could decline, which would be unhelpful to enterprise, employment and the recovery of the economy.

Chief executive officer Nick Fletcher said investors will be less inclined to take risks if CGT and inflation increase. ‘If CGT rises to 40 or 50% without taper relief, it may be less worthwhile taking as much equity risk (unless it is in your own business that qualifies for entrepreneurial relief), especially if inflation starts to rise and the purchasing power of the heavily-taxed gains is eroded,’ explained Fletcher.

‘Consider this: if you invested £100 into equity markets over five years and achieved 10% growth in an environment where inflation is 3.5% and CGT is 40%, the real after tax return on the £100 of capital would be 2.84% per annum. A 7% return in the equity market would yield an annualised real after tax return of 0.89%. Either of these may not be deemed very attractive by many investors compared to the alternatives,’ he said.

The general consensus is that CGT will probably increase. ‘Volumes of structured products might reduce but I think that applies to all investment plans that are capital gains taxable. We are just going to think a bit more cleverly about how to design structures and what tax opportunities arise from them. ‘We will have to wait and see what happens in June, but I don't think it will bring a stop to the market,’ said Gary Dale, head of intermediary sales at Investec Structured Products in London.

Jo Eccles, director of independent London property search company, Sourcing Property, said there is an increase in the supply of new property coming onto the market. ‘There are approximately one million buy to let properties in the UK and approximately 250,000 families who own second homes, so an increase in CGT is likely to have a widespread effect,’ she explained.

‘We may see a period of panic selling over the next few weeks as people seek to quickly dispose of second homes and investment property before the Budget is announced,’ she added.

Any increase in supply is a welcome change for buyers who have been facing high competition, a climate of sealed bids and demanding vendors, according to Eccles, and it is likely to suppress price growth over the short term as it has largely been fuelled over the past 12 months by a lack of supply, holding prices firm at near peak values.

‘Over the long term, it remains to be seen whether the proposed change in CGT, assuming it is introduced, will have a wider impact on the UK property market as a whole. There are concerns that it may reduce the appeal of buying UK property for investment purposes and we may see would be buyers turning to alternative assets instead. Taxation is especially crucial in the prime London market as purchases at this level are typically funded by cash, rather than borrowing,’ she said.