The UK-wide letting firm, believes that the widely trailed increases to capital gains tax (CGT) will have an unprecedented negative impact upon the private rented sector (PRS) and the wider housing market.

The firm believes that if, as has been predicted in the media over the last few weeks, the rate of CGT rises to match tax rates then higher rate taxpayers will see an increase from 28% to 40%. On a property investment over ten years this would mean that the annual gain for landlords, second homeowners and investors would be between 1.9% - 2.2% per year.

Given the additional costs involved in stamp duty land tax and land and buildings transaction tax in Scotland it makes property investment difficult to justify given the financial risks and the increasingly poor returns. The Chancellor risks killing investment in UK property and causing a shortage of homes for private renters.

David Alexander, joint chief executive officer of apropos by DJ Alexander, commented: “While the spending review is not the time when the Chancellor will announce any tax hikes it is clear from the Treasury’s messaging over the last week that increases are coming next year. CGT seems set to be top of the list for substantial increases and there is little doubt that landlords, second homeowners and property investors are firmly in Rishi Sunak’s sights.

“He sees this as an easy target politically and financially. Unlike many other assets property can’t hide and as CGT affects a relatively small part of the population it looks like an easy fix for the enormous debt accrued during the pandemic.

“But if Sunak widens the take and breadth of CGT the number of people liable will rise and landlords with one or a small number of properties will be drawn into the tax. The targeting of the tax may have unintended consequences. Equally he will understand that simply increasing a tax by a certain percentage rarely results in a directly comparable increase in revenues. The larger institutional investors will always have the option of shifting their investments elsewhere either geographically or into a different asset class resulting in a lower tax take.

“As with all serious policy changes it is predicting the unknown outcomes of the actions which will catch the politician unaware. The first clear risk is that this will have a major impact on the private rented sector potentially leading to a housing shortage in the rental market. Any large-scale exodus from the market by landlords and investors could also trigger a sudden fall in house prices if a large number of properties are suddenly dropped on the market ahead of a CGT hike deadline. Given the market is likely to dip in April once the temporary reduced stamp duty threshold is ended this could be a move which results in negative equity and financial losses for a great number of people.”

He concluded: “Any substantial increase in the rate of CGT will impact on individual landlords, second homeowners, and the small-scale investor the most. The larger landlords and investors will be able to utilise the skills of accountants to offset their exposure but for the smaller landlord the impact could be substantial.

“A property used to shore up retirement funds, or care home fees, could suddenly be hit by a tax which is imposed with little warning, on a sector that is exposed, at a time when the market is potentially fragile. The risk is the Chancellor ends up killing the PRS, fails to substantially increase the tax take, damages the property market, and ends up hurting landlords and tenants alike.”