AMATEUR investors, feeling the pinch of higher borrowing costs in recent months, have been offering properties for sale as the buy-to-let market has slowed. But after the changes in capital gains tax announced by the Government this week, they may well be tempted to hold on until next year.

For it’s not only second-home owners who will benefit from the new rate: buy-to-let investors will also pay just 18 per cent in capital gains tax – down from 24 per cent – if they have owned the property for nine years.

Seasoned investors are being tempted to hold on for the long term after noting that demand for rental homes is rising – and with it rental returns. Robert Jordan, of Jordan’s, an agency based in Manchester and Bolton, said: “A lot of professional buy-to-let investors have been buying and a lot of amateurs have been selling up.”

Fears of house price falls are fuelling the rush into rental properties, as owner-occupiers take time out to assess if the slowdown will set in – or turn out to be just a glitch. Landlords are grasping their first real chance in years to boost returns, and prices for rents are shooting up. Rent increases will reach 10 per cent this year across the country, according to Savills, and are expected to rise at a similar rate next year.

This week’s PreBudget Report also included changes to inheritance tax rules that allow spouses to pass on houses worth up to £600,000 tax-free. This may be further encouragement for owners to avoid the forced sale of inherited homes in favour of retaining them and letting them.

The shortfall of family homes for rent is particularly acute, as fewer three and four-bedroom homes are on the market since the introduction of home information packs. Frustrated families are being forced into short-term renting, and the demand is boosting rents. Estate agents in prime locations are trumpeting rent increases of more than 20 per cent this year; Hamptons International says that the number of prospective tenants is up 17 per cent in the past month and the number of renewed contracts down 7 per cent, as landlords choose to negotiate more profitable deals.

Subdued returns are being reported in some city centres, such as Manchester and Bristol, where there is a glut of investor-owned apartments. But rent increases are being reported across the country. Hannah Read, lettings manager at E. A. Shaw, a Central London agent, said: “The majority of our studios and one-bed apartments are going to best bids, which is very unusual.”

Malcolm Harrison, of the Association of Residential Letting Agents, says: “What we are seeing is the traditional counter-cyclical effect. When there is a soft or falling sales market, you have high rental interest. We have every reason to believe that this will happen in this slowdown, whether it lasts six months or six years.”

Jane Pawsey, pictured right, who lives with her eight-month-old son, Thomas, is one of the new breed of wait-and-see renters, who have sold up and are taking time out of the market. Unable to buy a suitable property in her price range earlier this year, she said she found that the rental market in Bristol offered better options. “I haven’t rented for seven years and it certainly has changed. The last time I rented it was a struggle to find a decent property and if one came up, you would ring up and it was let already. Now there is more choice and far better quality.”

She said that, despite what seemed to be a glut of two-bedroom flats on the market, prices remained firm – and were close to those for the rent of a two-bedroom house.

Many investors have been happy to tolerate shortfalls in rental returns while capital gains were handsome. The latest Landlord Mortgages figures, due on Monday, will show that yields, which have been in almost constant decline since the end of 2005, have now stabilised, signalling that investors can now hope to make higher profits.

FACTFILE

- From 6 April 2008, there will be a single rate of CGT at 18 per cent.

- Taper relief, which currently applies to capital gains, and which reduces the capital gain from up to 40% to 24% over a period of 10 years, will no longer apply. Other rules, such as indexation and the 1982 rebasing rules which currently apply to properties that have been held for a number of years will also be abolished.

- This means that the length of time a property has been owned will be irrelevant; someone who has owned a second home for 1 year will be taxed at the same rate as someone who has owned theirs for 20 years. The capital gains annual exemption will continue to apply, which (in 2008/09) will exempt the first £9,200 of the gain from the charge to tax and disposals of principal private residences will continue to be exempt from CGT.

For the latest data on the property market: timesonline.co.uk/property

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