plym77 Posted October 11, 2007 Report Share Posted October 11, 2007 Hi all Following Alistair Darling’s first pre-budget report, many of you will have become aware of the simplification of the Capital Gains Tax (CGT) Regime from 6 April 2008. However many of you may not be aware of how this may affect your interests. I have therefore prepared a few basic computations to show how this may affect the residential landlords amongst us. I have prepared several scenarios and each example assumes that the property is held jointly between husband and wife. Other assumptions are that the personal allowance, basic rate tax band and CGT annual exemptions remain the same for the tax year ended 5 April 2009 as are currently in place. I have also assumed an increase in the value of the property over the years – obviously in reality the figures could fluctuate at a different rate. The examples demonstrate the difference in tax consequences between: Couple 1) ‘Basic Rate Taxpayers’ – Husband and Wife each earn a little income (in the region of £15,000 each), leaving £25,000 each of their basic rate tax band unutilised. This would mean part of the Capital Gain (after reliefs and allowances) is taxable at 20% and the balance at 40%. Couple 2) ‘Higher Rate Taxpayers’ – Their other income fully utilises Husband and Wife’s basic rate tax bands, meaning that Capital Gains Tax would be payable at 40% on the whole Capital Gain (after reliefs and allowances). AND the difference in the tax position for the sale of property on 5 April 2008 (2007/2008 tax year) and 6 April 2008 (2008/2009 tax year). ............................... Example 1 – H & W purchase a Buy to Let (BTL) property on 31 March 1982 for £25,000. They sell the property in April 2008 when the value is £250,000. Sale in the tax year ended 5 April 2008: Providing the sale is made by 5 April 2008, then Indexation and Taper Relief (40%) would still be available. The estimated CGT that would be payable 31 January 2009 would be: Couple 1) would have a CGT liability in the region of £30,000. Couple 2) would have a CGT liability in the region of £40,000. Sale in the tax year ended 5 April 2009: If the sale is delayed by one day to 6 April 2008, then under the new rules, Indexation and Taper Relief are no longer available, replaced by a single CGT rate of 18% (after taking in to account the CGT annual exemption). In this example, the new CGT liability would be in the region of £37,000 for both Couple 1 and Couple 2. CONCLUSION – In this instance, the new regime adversely affects the basic rate taxpayer, but a higher rate tax payer is better off! ........................................ Example 2 – As with example 1, except the property is purchased in March 1998 for £75,000. Sale in the tax year ended 5 April 2008: Couple 1) would have a CGT liability in the region of £25,000. Couple 2) would have a CGT liability in the region of £35,000. Sale in the tax year ended 5 April 2009: If the sale is delayed by one day to 6 April 2008, then under the new rules, the CGT liability would be in the region of £28,000. CONCLUSION – In this instance, the new regime adversely affects the basic rate taxpayer, but a higher rate tax payer is better off! .................................. Example 3 – As with example 1, but the property is not purchased until October 2005, at a value of £150,000. Sale in the tax year ended 5 April 2008: Couple 1) would have a CGT liability in the region of £23,000 Couple 2) would have a CGT liability in the region of £33,000. Sale in the tax year ended 5 April 2009: If the sale is delayed by one day to 6 April 2008, then under the new rules, the CGT liability would be in the region of £15,000. CONCLUSION – For new property purchases with no Taper Relief or Indexation available, then the new regime (in the example above) leaves both couples significantly better off. .............................. OVERALL CONCLUSION FOR RESIDENTIAL RENTAL PROPERTY? It will very much depend on individual circumstances, for example the likely profit to be made, and the length of ownership. However, it would appear that those who could be the worse hit by the new regime are people on lower incomes who have held their investment properties for a longer period. The impact of Principal Private Residence Relief and Lettings Relief remains unchanged in the Pre-Budget Report. ................................. WHAT ABOUT COMMERCIAL PROPERTY? The new regime will have a significantly adverse affect on those people who are entitled to Business Asset Taper Relief on the sale of a commercial property used for qualifying purposes. Assume that the property in Example 3 above was in fact a qualifying commercial property, for example a shop used by a trading business. Under the old regime, a sale by 5 April 2008 would mean that full Business Asset Taper Relief would be available (after 2 years of ownership) at 75%. Therefore Couple 1 would have a joint CGT liability on 31 January 2008 in the region of £1,300, with Couple 2 only marginally increasing the liability to approximately £2,600. However, if the sale was delayed until 6 April 2008, the CGT liability will hike to over £14,600!! Are you looking at transferring your commercial property in to a Self Invested Personal Pension (SIPP)? Then you need to consider whether now is the right time to make the transfer. .................................... WHAT DO I DO? Many factors will affect the overall outcome, whether it is profit made, time held, type of property owned, whether the property had ever been used as the owners main residence etc. I would suggest that anyone who is considering a sale/gift of property in the near future has their CGT position reviewed to establish whether they are adversely affected by the new CGT regime. Once we pass 5 April 2008 then based on the pre-budget report, there will be no turning back! Allow yourself enough time to make a decision – it takes time to advertise and sell a property! If there is the possibility that you will be adversely affected by the new regime but do not wish to sell then there is still tax planning that can be done to crystallise the position as it stands now in order to secure the more beneficial tax position – however this cannot be done retrospectively and so should be considered sooner rather than later to ensure there is sufficient time to put anything required in place. Speak to your tax adviser! If you require a review of your Capital Gains Tax position or any other tax advice, please do contact me on sherena.glanton@horwath.co.uk and I would be happy to discuss this further with you. In the meantime, I hope the above is useful. Kind regards Sherena Glanton Chartered Tax Adviser Link to comment Share on other sites More sharing options...
GPEL Posted October 11, 2007 Report Share Posted October 11, 2007 Thanks Sherena for this excellent response. Link to comment Share on other sites More sharing options...
Mr Freefall Posted October 11, 2007 Report Share Posted October 11, 2007 Sherena Thanks for the update on Principal Private Residence Relief and Lettings Relief, and the basic calculation you have posted... Regards Mr F Link to comment Share on other sites More sharing options...
plym77 Posted October 11, 2007 Author Report Share Posted October 11, 2007 No problem - they are basic calculations but it is I feel the best way to try and demonstrate the differences. Mr F - I am drafting a response to your email as we speak Sherena Link to comment Share on other sites More sharing options...
Melboy Posted October 11, 2007 Report Share Posted October 11, 2007 Thanks Sherena.......this has got me thinking! I have held my properties for 10 years for the taper relief aspect of things and I am wondering whether I shouldn't bale out and take my cash on at least 1 property (which I am not keen to do I can tell you) or just let it ride on. I suppose it only becomes a problem if you want to sell and take some cash. Trust this bunch of lying politicians to upset the apple cart!! Mel. Link to comment Share on other sites More sharing options...
Recommended Posts
Archived
This topic is now archived and is closed to further replies.