Fitch Ratings has said that the imminent change of the UK capital gains tax regime may lead to the first major test of performance for buy-to-let (BTL) mortgages. The UK BTL sector has grown rapidly and performance has been stable since the market's inception in 1996.

However, as economic prospects are adjusted downward and house prices start to fall month on month, concerns over the likely future performance of this particular sector is growing. The reduction of capital gains tax on properties sold by BTL investors from the beginning of the tax year on 6 April 2008 will provide evidence on how sensitive investors really are to changes in the economic and fiscal environment. In particular, it will test BTL investors' stated resolve to retain properties or whether an increasing number will be tempted to sell and crystallise past capital gains at a lower tax rate.

"With expectation of further house price decline in the coming months, the capital growth incentive for BTL investment has faded. Data on recent BTL investor behaviour shows an increasing number 'marking time'. This may change when the new tax treatment effectively makes it cheaper to sell," says Stuart Jennings, Group Credit Officer for EMEA structured finance at Fitch.

"The private rental sector may stabilise the property market during a benign environment. However, the dynamics are different during a downturn as not only the affordability of home owners is suffering but also that of tenants. The argument that those who cannot afford to buy will support the demand for rental accommodation does not necessarily help buy-to-let investors as tenants' ability to pay may not generate sufficient rent to service the mortgage," adds Atanasios Mitropoulos, Director in Fitch's research team.