Taxing matters
How will the reforms to Capital Gains Tax affect property investors? Kate O’Raghallaigh finds out.
Ever since Chancellor Alistair Darling’s Pre-Budget report in October 2007, Capital Gains Tax and taper relief have been preying on many investors’ minds. Capital Gains Tax (CGT) is the tax payable on any gain you make on the sale of an asset. Prior to the 6 April this year (when the 2008 Budget’s reforms will come into effect) unless you qualify for taper relief, you pay CGT in line with your earnings. The rates at which CGT apply therefore, are currently 10%, 20% and 40%, depending on your income.
Taper relief was introduced in 1998 and allowed certain people – mainly small businesses, property investors and entrepreneurs – to pay less CGT on their assets, depending on how long they owned them for. Most property investors receive non-business asset taper relief, which meant that if you own your buy-to-let property for three years or more, a reduction of 5% per year thereafter applies, resulting in a maximum reduction of 40% after 10 years.
However, back in October of last year, the chancellor proposed a few changes to the established regime. Firstly, he abolished taper relief, introducing a flat rate of 18% for CGT instead, which means that no matter how long you own an asset or what kind of taxpayer you are, you simply pay 18% on any gain, after your allowance of £9,600 (for the 2008 to 2009 financial year) has been taken into account. These changes have since been formalised in the 2008 Budget and will come into effect on 6 April 2008.
You win some, you lose some
But what does this mean for property investors? It depends on what kind of investor you are, but broadly speaking, recent investors from the higher tax bracket (40%) will benefit, according to Ian Potter, spokesperson for the National Association of Estate Agents. He explains: “It all depends on how you hold your property and when you bought it, but property investors who were previously taxed at 40% and are new to the market, will not lose out. However, landlords who have held property for a long time will find themselves in a complex situation.”
Steve Hilton, spokesperson for the National Landlord’s Association, agrees. He explains: “The people who are really going to benefit from the flat rate of 18% are those with their capital growth hat on – the ‘get rich quick’ landlords who have been in the market for less than 10 years.”
For example, if you bought a property in 2000 and were a higher-rate taxpayer, you would now (that is, until 6 April) be eligible for a 30% reduction in CGT, leaving you with a 28% liability instead of 40%. Therefore paying the new flat rate of 18% instead, will mean a reduction in your tax bill.
However, for a lower-rate taxpayer who owned a property for the same period, the flat rate of 18% will mean an increase of 4%, as they would previously have paid 14% under taper relief. Buy-to-let investors may be able to offset costs related to the property – if they paid for capial improvements, for example. This includes permanent additions, such as installing double glazing or building an extension or conservatory.
A race to sell?
So does this mean that we can expect a surge of buy-to-let properties on the market? Not necessarily, says Potter. He adds: “I don’t predict a surge in people selling their properties – most of the landlords we represent are portfolio landlords who have been in the business a long time, and who are looking to expand rather than sell up immediately.
“There is also an incentive for portfolio landlords to stay in the market, as we are entering into a downturn in the economy and this is when people will generally turn to renting in place of buying a property.”
Potter says: “Those who don’t stand to benefit from the reforms would really have to have put their property on the market very early on.”
The CGT reforms will undoubtedly have been bad news for some property investors. However, the fact remains that the most important point to remember with any investment – particularly with buy to let – is that there are no guarantees. During the time you hold any investment markets will almost certainly change, as will Government legislation. All of these issues should ideally be taken into consideration before you take the plunge into the buy-to-let market.
For more information on this year’s budget, click here
