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By Richard Teather, Editor, Finance Confidential. 27.10.07 We recently commented on how Alistair Darling’s reforms could damage the AIM market. Now let’s look at a potential disaster lurking in the Budget for the housing market.... See more » By Richard Teather, Editor, Finance Confidential. 27.10.07 We recently commented on how Alistair Darling’s reforms could damage the AIM market. Now let’s look at a potential disaster lurking in the Budget for the housing market. Darling’s capital gains tax reforms have been heralded as ..... ....good news for buy-to-let investors. Under the old system, unless you were selling a “business asset” (which buy-to-lets aren’t), taper relief would give you a tax rate between 40% and 26%, depending on how long you’d owned it. But that is all to be swept away, and everyone will pay a flat 18%. That’s a big tax reduction, but is it really good news? Thanks to the housing market bubble, most buy-to-let investors are getting tiny rental yields but sitting on large capital gains. With the market expected to flatten out – if not worse – the temptation is to sell and take the profit, but people are put off that by the thought of a huge capital gains tax bill. If that tax bill is halved from April 6 th 2008, a lot of buy-to-let owners could see it as a good time to sell - flooding the market. Let’s look at an example. Say you bought a typical London flat three years ago for £225,000, with an 80% interest-only mortgage. You are now getting a monthly rental of £1,350, but the initial discount on your mortgage is running out so your interest rate is about to go up to 7.59%. That leaves you with a profit of £212 per month, or just £1,526 per year after tax – before deducting any management or maintenance costs. That flat is probably now worth £330,000. If you sold it, after the capital gains tax changes next April you should be left with over £132,000: £ Sale proceeds 330,000 Less outstanding mortgage (180,000) Less Capital Gains Tax (18%) (17,244) Net cash remaining to invest 132,756 Forget what you paid for it; that’s history. Your real investment in that property is £132,756. On which you are making a profit of £1,526 per year. That’s a yield of 0.1%! The real situation is even worse; factor in a 12% management fee, £900 per year maintenance and 5 weeks per year void, and you are looking at an annual loss of 1.3%. Even with a fairly optimistic house price increase (say 6%, less 18% tax), that leaves you with a net yield of 3.6%. Pathetic! You can get 4.1% guaranteed after tax from a savings bond with the Abbey! Compare it to unit trusts - gold funds up 50% in the last 12 months, India or Eastern Europe the same, and plenty of China funds returning over 100% on the year - and your buy-to-let is now grossly under-performing. This doesn’t mean that you should necessarily sell. But lots of other investors will be doing the same sums, and many of them will conclude that buy-to-let isn’t worth the hassle for the next few years. There are about 800,000 houses owned on buy-to-let mortgages. About 450,000 houses come on to the market each quarter. Even if just 20% of buy-to-lets are put up for sale next April, that would flood the market. With confidence low anyway, that could easily cause a slump. END My reply: Dear Oliver, This was interesting and thanks for sending it. However, it misses one basic fundamental, in that most professional property investors won't be selling, and they don't invest for rental profit, but for capital growth. They don't need to sell to get at the profit. but they will be able to carry on milking their property, by refinancing, for ever, tax free. The article quotes an "optimistic" potential growth figure of 6%, well the government are predicting 5.5% and we all know they will be underestimating so as not to end up with egg on their faces. Historically, according the Office of National Statistics, growth has been running at 12.6% overall, even taking slumps into account. The south-east has been appreciating at 14.5% year on year. You were right to keep your cash and leverage with a mortgage - hope it's interest only! And I hope you are learning to trade the stockmarket, so you can make money in a rising, falling or sideways market. 2007 is, after all, the year that Robert Kiyosaki predicted we would start to see the See less »

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