Don’t sell anything yet!

The Chancellor’s Pre-Budget Report, rushed out last month in case of an election which never happened, contained major changes in scope and complexity in the area of Capital Gains Tax.

As always, the headline was intended to win votes, but in this case it seems more a case of ‘reform in haste, repent at leisure’, since it seems to have caught a number of groups of people it was never intended to, as well as those it was aimed at. The Americans call it ‘friendly fire’, or perhaps ‘collateral damage’.

The accompanying ‘spin’ was that the tax had become over-complicated and urgently needed simplification. I can think of another thousand taxes that fit the same description; Gordon Brown was nothing if not grossly over-complicated.

But it’s great news for Residential Property Investors – so long as they’re not standard rate taxpayers.

The difference stems from what’s known as ‘Taper Relief’ and the different treatment of ‘Business Assets’ and ‘Non-Business Assets’.

At present (and until April 5, 2008), any residential investment property you sell is subject to Capital Gains Tax as a Non-Business Asset. This means that the 40% rate of tax (20% for standard-rate taxpayers) is reduced (tapered) for the number of full years you have owned the asset. After 10 years (the maximum for which relief is calculated), the 40% is effectively reduced to 24% and the 20% rate reduced to 12%. It’s calculated in a slightly different way, but that’s the net effect.

From April 6th 2008, there will be a single rate of 18% which will apply to everybody. It will also apply to Business Assets, which is what has caused the uproar, but for us property investors with our Non-Business Assets it is a good thing, but only if we are higher rate taxpayers.

If you plan to sell one or more residential investment property in the near future, and you are a higher rate taxpayer, you will save money by delaying the completion date until 6th April, 2008.

When the capital gain has been computed, you are still allowed to deduct your annual exempt amount - £9,200 per person for the current tax year – but the residue will be taxed at a flat 18% from 6th April, 2008 onwards. For the higher rate taxpayer this is a reduction from 40% (or from 24% after 10 years), depending on how long you have owned the property.

For a standard-rate taxpayer, however, who pays between 12% and 20% depending on how long they have owned it, the 18% is quite likely to be a tax increase.

Furnished Holiday Lettings (in the UK) are currently classed as business assets, so selling one of these after April 2008 will attract CGT at 18% against the 10% you currently pay after 2 years. If you own one of these and you are thinking of selling it, you would therefore be well advised to complete the transaction by 5th April, 2008 at the latest.

Please note: This article is intended as general information only. It does not constitute tax advice. For detailed advice on any tax issues you should consult your accountant or other tax advisor.

www.viceroyinvest.com

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