U.K. Drops Huge Capital Gains Tax Hike

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Property executives in the U.K. are breathing a sigh of relief, after the new coalition government decided not to make good on threats to dramatically raise capital gains tax.

Last month's reports suggested the government was prepared to raise the tax to more than 40 percent, which many feared would scare off investors. The looming increase helped spark a surge in property listed for sale, industry executives say.


Instead the new budget calls for a relatively rational raise in the capital gains tax from 18 percent to 28 percent. And the rate will only affect higher tax brackets, not middle income earners.

"This is about as good as it could have been given the worries about a higher rate of capital gains tax and the threat of movement on stamp duty," Jonathan Thompson, a partner at KPMG, told the Financial Times.

The budget offered a variety of good news for the property community, which was braced for the worst. Among other details, profits from holidays homes used as rentals will still be taxed at the business rate of 10 percent, not the new capital gains rate. And owners will be able to write off furnishings and other expenses.

But some believe the raised tax may be enough to dampen investor enthusiasm.

"Investor buyers have helped replace deposit-strapped first-time buyers and this rise in capital gains tax removes an element of support for the all-important bottom end of the housing market," said Miles Shipside, commercial director of Rightmove, the property web site. "However, a drop in prices could help rekindle their interest following this capital gains tax setback."

The new tax level goes into effect tonight, which should help stave a rush of homes to the market.

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