ExpatSingapore - Capital flight alert

BRITISH PROPERTY INVESTORS who managed to hang on to their assets during the worst credit crunch and economic slump in a generation are about to be dealt another blow by the country’s new government. As part of urgent efforts to address the UK’s huge budget deficit, the new Cameron-Clegg coalition administration is proposing to increase capital gains tax on all non-business assets from the current 18%, to 40%, and possibly even to 50%. This tax hike will affect shares, second homes, buyto- let investment properties and collectable assets, and is largely expected to take effect in the tax year beginning April 2011.

Market watchers are warning that the tax hike could lead to a fire-sale of buy-to-let properties, and kill off investment interest in the UK property market for some time. Details of the proposed tax hike will be revealed in the Emergency Budget by June 22, but property agents like Savills are already advising clients who have made good capital gains and are looking to rationalise their property portfolio, to sell their investments before April 2011, to avoid the tax hike.

Estate agents have reportedly received an increased number of calls from buy-to-let landlords looking to divest their property holdings. Many second-home owners and investors will see this as an opportunity to come out of the market for the short term, says James Hyman, of surveyor and property consultant firm Cluttons.

The silver lining to all this, if there is one, is that homebuyers who were priced out of the market might finally find bargains, especially in London, where a chronic supply-demand imbalance has kept prices high. Indeed, Hyman says the tax hike could provide the London market with the supply it has been “crying out for” over the last 18 months.

The flipside is that the tax hike could spur a stampede for the door and create an oversupply in the market that could further drive down prices.