The recent changes to stamp duty and a cut in capital gains tax are set to boost investment in property funds, but experts argue this might be short-lived.
The latest Budget stated that all corporate investors will face the addition 3 percentage point stamp duty increase on additional properties purchased from April, with some expecting that the investors would be exempt.
This will have a particular impact on the UK’s regional investors who will see average tax payments jump up, on average, 2.5 times, according to property investment adviser firm London Central Portfolio.
Chancellor Osborne cut capital gains tax from 28 per cent to 20 per cent for higher rate tax payers and from 18 per cent to 10 per cent for basic rate tax payers.
London Central Portfolio chief executive officer Naomi Heaton says property funds can benefit from the tax regime.
She says: “As large investors, they can strategically capitalise from the commercial rate of stamp duty, which applies to buildings of six or more properties. While the Budget has seen an increase of commercial stamp duty land tax to 5 per cent, this remains significantly lower than the new residential rates of SDLT.”
Hargreaves Lansdown senior analyst Laith Khalaf says, although investing in property will become less attractive due to the tax changes, this might not lead to a significant boost in property funds.
He says: “I think people are tempted to invest in property because they can see, touch and feel bricks and mortar. This has become much less attractive as a result of the property tax changes introduced by the Chancellor over the last year, and I suspect this will lead to more people investing in funds as a result.
“However, I believe they will mainly reallocate to more traditional equity funds rather than residential property funds. Once you take away the physical nature of property I think you lose a lot of its cache.”
Tilney Bestinvest managing director Jason Hollands agrees that the capital gain tax cut, in particular, is “a further nail in the coffin” for buy-to-let as an attractive investment option following on from the stamp duty increase and the treatment of mortgage tax relief for buy-to-let.
He says: “From a tax efficiency point of view, buying a property fund has advantages over an actual buy-to-let property, but I don’t think these changes in themselves will naturally translate into a boom for property funds.
“Brits have a long obsession with owning property as a tangible asset you enter and the visible status that owning property brings in the minds of many, long and culturally entrenched attitudes won’t simply be displaced by a weighing up of the investment logic between owning a house or flat in London or holding a financial product instead.”