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What Effect Does the Budget Have on the Property Market?

The new coalition government’s budget was delivered on 22nd June 2010, and Chancellor George Osborne had warned that it would be tough with many people being ‘hit hard’. This article will look at how the budget will affect the housing market.

Budget Changes to Capital Gains Tax will affect those with second properties

Capital Gains Tax is another issue that may affect the housing market. This applies to second homes; either holiday homes or properties bought as buy-to-let investments, while your primary residence i.e. the family home is exempt from capital gains tax.

The government has said that those who pay higher rates of tax will be subject to a 10% increase in capital gains tax, rising from 18% to 28%. This came into effect immediately and as it stands those of you who are higher rate tax payers, who earn more than £44,875 per year (i.e. if you’re taxable income is more than £37,400) are subject to the new rate. For those on a low or middle income who pay income tax at the basic rate, capital gains will continue to be taxed at 18%.

Capital Gains Tax only applies, if a profit is made from that asset – so in other words, the increase in its value from what you originally paid to when you sell it. For example, a property bought for £200,000, which you sell today for £300,000 would only be taxed on the profit you make, of £100,000.

Is there a Capital Gains Tax exemption for the elderly?

As a result of the budget elderly homeowners who move into care homes may have to pay Capital Gains Tax when later selling their home.

1 in 4 of the UK’s 380,000 elderly care home residents are also homeowners. Many elderly people decide to keep their family home for several years even when they move into care, with the hope that one day they will return back home when they become well again. This means that if they have lived in the care home for 3 years the HMRC deems that as the primary residence.

Therefore when they decide to sell their family home to pay the growing costs of being in care, their own home would have the same status as a second home or buy-to-let property. Capital gains tax will then apply to the second home if the house increases in value by more than £10,000 during the 3 years the owner is in the care home.

Stamp Duty Tax

Stamp Duty Land Tax (SDLT) is another issue to be reviewed as a direct consequence of the new budget. Stamp Duty is a tax that is applied whenever you purchase property or shares. For all property purchases SDLT must be paid. The budget has revealed that the government has promised to review whether further amendments to SDLT rules is needed to prevent tax avoidance on higher value property transactions. Meanwhile, they will continue to review the period known as ‘Stamp Duty Holiday’, which is a relief of the tax for first time buyers. The review will take into account its impact on affordability and value for money.

Council tax payments

The government has promised to freeze council tax payments in 2011-2012. This will require the government to work with local authorities but this is good news for those who pay council tax.

How does Housing Benefit affect landlords?

Another large issue regarding changes to the housing market is the Chancellors announced plans for a major reform of the Housing Benefit system beginning in April 2011. The idea is that the reform will make the welfare system fairer and more affordable and the Chancellor is quoted as saying that the measures they plan to implement will reduce Housing Benefit costs by £1.8 billion by the end of Parliament.

Here is a list of some of the measures the reform will include[1]:

• re-setting and restricting Local Housing Allowances

• increasing deductions

• reducing certain awards

• new maximum limits on housing benefit: from £250 a week for a one-bedroom flat, £290 a week for a two bedroom property, £340 a week for a three bedroom property and £400 a week for a property of four or more bedrooms

• time-limiting the receipt of full Housing Benefit for claimants who can be expected to look for work

• restricting Housing Benefit for working-age claimants in the social rented sector who are living in a larger property than their household size warrants

• re-adjusting Support for Mortgage Interest (SMI) payments - currently 1.58 percentage points above the Bank of England Base rate; from October 2010 SMI will be paid at the Bank of England’s published Average Mortgage Rate

These new measures have done little to ease public anxiety regarding the current property market. Even Labour MPs warn of a housing crisis in the South East and London, where rents are much higher. In London about 170,000 families receive the local housing allowance and pay rent to landlords.

Seven of the most expensive local authority areas in London such as: Camden, Hackney, Hammersmith & Fulham, Kensington & Chelsea, the City, Tower Hamlets and Westminster - local private rents are much higher than the benefit cap within the borough. In all the other London boroughs families on housing benefits will not be able to pay the rent because larger properties cost much more than the cap.

As stated in a previous LPB article, it was anticipated that Capital Gains Tax would rise to 50%. Whilst the increase was only to 28% there is a worry that this will still weaken demand for property by second home buyers and buy-to-let investors.

For example, many London boroughs are cutting the housing benefit allowance. Therefore landlords who rent their investment properties to the council for long-term periods for guaranteed rent now have to rethink their strategy. This means that this once profitable monthly cash flow will soon stop, resulting in landlords looking to rent out their properties privately.

However, The London Property Buyers could provide you with a good alternative to your property problems. We are happy to rent out properties long term with a guarantee rental payment to you every month regardless of whether your property is empty or not.

To find out more about our unique services and to reduce the cost of Capital Gains Tax we can help buy your property today, as well as providing other useful solutions to everyday property problems. So call The London Property Buyers now to find out how we can help you today: 0800 879 9889

If you are looking to sell your property quickly, then contact The London Property Buyers NOW on: 0800 879 9889

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