Is the housing market about to see a fire sale?

The plan to raise capital gains tax (CGT) from 18 to 40 or even 50 per cent sends a red alert to Britain's buy-to-let investors. Profits made on the sale of property that is not used as a main home are subject to CGT, and with the emergency Budget a month away, there are some who suggest a fire sale of buy-to let property could be under way.

"The suggestion that capital gains tax could be as high as 50 per cent next April could hinder many buy-to-let investors who are looking to leave the market, as well as those looking to make their move into it and who plan to sell in the short term. This problem is likely to be compounded later this year as interest rates begin to creep up," says Dominic Toller, managing director of PropertyEarth.net.

A surge in property sale instructions could cause UK house prices to fall, offering more opportunities to other homebuyers and new investors who can take advantage of existing landlords with several properties on their books looking for a quick sale. These investors face a hefty increase in their tax bill once the increase kicks in, and they may well decide to sell and be taxed for any gain at the current CGT level. This decision will be based largely on how they think the property market will fare as a whole.

"For somebody who has owned property for some time, say, 10 years, they will have a big built-in gain. So if they don't think it will continue climbing, it's going to be a good idea to sell and trigger that gain at a lower tax rate," says Bill Dodwell, head of tax policy at Deloitte.

However, Andrew Fallows from estate agents Carter Jonas says investors with a large portfolio are boxed into a corner if they want to sell up before the CGT changes take effect and will struggle to get full value for their properties.

"They have to decide whether accepting a discount will be mitigated by the tax saving," says Mr Fallows.

It's also important to remember that investors faced a CGT rate of 40 per cent just a few years ago, before the flat rate of 18 per cent was introduced, so many people will have made their original investments on the basis of a higher tax rate. Experts argue that the reaction from investors will depend largely on the detail behind the new proposed rates and, in particular, whether investors profits will be protected against inflation.

"The old rules dealt with inflation by taper relief, and before that again there was indexation. When Vince Cable put this together he did include indexation relief, so it seems likely to me that they will continue to do so," says Mr Dodwell.

And for those choosing to stick with their buy-to-let properties or thinking about entering the market for the first time, there are signs of renewed optimism. Take mortgages, for instance: higher loan-to-value (LTV) deals are now more available and lenders are returning to the market.

"There were just four deals available in September 2009 at 80 per cent, all of which were fixed deals from Clydesdale/Yorkshire Bank. Today there are 13 deals available at 80 per cent, with Shepshed Building Society and the Mortgage Works moving back into offering these deals," says Michelle Slade from financial information site Moneyfacts.

Many landlords have struggled in the past few years with lenders tightening lending and insisting on huge deposits in the wake of the credit crunch. Buy-to-let mortgage products all but disappeared during the credit crunch; at its peak in August 2007 there were more than 3,662 available. But today that figure stands at just 304 according to Moneyfacts. However, there are encouraging signs that the buy-to-let market is taking an upward turn.

Firstly, Paragon, which put a freeze on new lending back in 2008, is expected to make a return to the market and begin lending again soon after reporting a surge in profits. Also, this week the Mortgage Works, part of Nationwide, launched a range of deals requiring a deposit of 20 per cent, including a one-year fixed rate at 4.69 per cent, albeit with a hefty arrangement fee of 2.5 per cent.

"The move by the Mortgage Works is significant in stretching the market out back up to 80 per cent LTV. This is good news to see a lender making a clear statement of intent to continue to be a big player in the sector. Aldermore Bank is also expected to launch into buy-to-let lending imminently," says David Hollingworth from broker London & Country.

Landlords themselves are also feeling more positive about the outlook for their lettings business. The new Landlords' Optimism Index from the NLA shows that 57 per cent of landlords rate their overall prospects over the next three years as good or very good – the highest level since 2007.

This renewed buoyancy is partly down to an increase in tenant demand and rising property prices, but it remains to be seen whether the plans for CGT will dampen spirits. One possible outcome is that there will be a sharp increase in the amount of the properties on to the market.

"The rental market is already suffering from a severe shortage of new rental stock at the moment. Increasing the CGT rate will not only persuade many experienced landlords to sell up in the next six months, but it will also discourage new landlords from entering the rental market," says Matt Hutchinson, director of flat- and house-share website Spareroom.co.uk.

With uncertainty over house prices and interest rates, many investors may decide to keep a hold on their investments and let their tenants cover their mortgage payments. Buy-to-let landlords are usually prepared to be in the market for long term gains, not profits from a quick turnaround, so an exodus of professional landlords is unlikely, regardless of how CGT rates fare.

"I expect that many landlords will continue to take a long-term view on their buy-to-let portfolio that will also continue to generate income in the meantime," says Mr Hollingworth.

Expert View

Andrew Fallows, Carter Jonas, Estate Agent

"I don't see that there will be a great rush of investors selling their properties but it all depends on the circumstances of the individual. Someone with one or a couple of investment properties is going to continue to hold those because the taxable gain becomes quite small when you take into account personal CGT allowances. However, for investors with a large portfolio, allowances won't have such a beneficial impact, and with potentially a very short time to move a portfolio, it's going to be very difficult to get full value for their properties."