What does it mean for residential property?

Lucian Cook, Director of Savills Residential Research comments:

"The expected changes to capital gains tax legislation will particularly impact higher income tax rate paying investors and second home owners, for whom the effective rate of tax could potentially rise from 18% to 40% or 50% (ie rates "similar or close to those applied to income").

"Investors looking to rationalise or reorganise their property portfolio, particularly those who have already seen good capital growth, could avoid a hefty tax burden by disposing of their asset before April 2011. This would include those who have bought investment property as a pension pot; some of whom may now be tempted to sell and invest in other asset classes.

"Bringing forward sales of this type could distort some local markets at a time when the early stage recovery is already looking fragile."

Residential vs other asset classes

"The higher tax liability will make property investment less tradable, which in turn may limit the flow of second homes and existing investment stock to the market after next April.

"On the demand side it is important to remember that the same tax rate will apply to all investment classes.

"However, because total returns from residential investments depend heavily on capital growth, the net of tax returns will be harder hit than some higher income yielding alternatives. This said, we do not believe that this will significantly detract from a bricks and mortar investment."

Inheritance tax planning

"Those who want to pass investment or second home property on to the next generation may look to do so within this tax year, thus incurring capital gains tax at the existing rate rather than inheritance tax at a potentially much higher rate at a later date.

"When passing a property from one estate to another in this way it has to be assigned a market value and a 'capital gains tax occasion' arises. Therefore, a transfer of ownership within the family now would crystallise the gain and fix the capital gains tax at 18%, thus avoiding the potential risk of future rises."

Part time owner-occupiers

"There is no indication that principal private residence relief will be affected, meaning that for most owner occupiers the change in CGT rates will have little or no effect.

"However, some owners who have occupied their property for only part of their period of ownership face an increased tax bill when they come to sell.

"Properties ancillary to a main residence, such as lodge cottages, staff flats, and development plots in the garden will all be under close scrutiny. Owners will be keener than ever to ensure that it meets the requirements to be treated as part of the main house.

"In the past indexation or taper relief has been available to mitigate the pain of capital gains tax. It will be interesting to see what replaces it, to avoid investors and second home owners being charge a tax on inflation."