By Gee Sahota
Following on from measures proposed in the pre-budget report in October last year, Chancellor Darling has now confirmed the radical overhaul to the way Capital Gains Tax will be calculated, ahead of the official budget release in April – a move which will leave both winners and losers in its wake.
Capital gains tax (CGT) will change from 1st April 2008, with the introduction of a single tax rate of 18% and a complete abolishment of the taper relief system that is currently in place. The introduction of the single band tax of 18% will create a more simplified system and bring the rate for businesses and non business assets more in line with each other. Chancellor Darling also announced there would be a 10% rate on gains of up to £1m, to help entrepreneurs.
This is great news for buy-to-let investors and owners of a second non-residential property. Investors pay CGT on the difference between the price they paid for the asset and the price they sell it for. As it stands, the tax rate is 40% for the first three years of property ownership, falling by 2% a year to a minimum rate of 24% after 10 years of ownership.
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The new system 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, however, which (in 2008/09) will exempt the first £9,200 of the gain from the tax charge.
As far as the buy-to-let market is concerned, landlords will certainly emerge as the winners of the situation, as they will see a significant reduction in tax should they decide to sell a property.
With April around the corner and predictions of a fall or at least a faltering housing market it is likely that many investors will hold out until April before putting any properties on the market, a situation which could see a dramatic drying up of supply until then. After April we may see an influx of residential property coming onto the market as residential landlords take advantage of the more favourable taxation regime.
"There could be a flood of buy-to-lets on the market in April," says Ruth Dooley, Tax Partner of Accountants, Grant Thornton. "There is a degree of slowdown in the property market so some may want to get out."
Inexperienced investors, feeling the stress of the recent higher borrowing costs, will definitely welcome the new tax law. Usually less equipped to cushion themselves against a downturn in the housing market, April 2008 presents the perfect opportunity for them to sell up at a time when there is a shortfall of properties and in doing so, putting a healthier profit in the bank.
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Seasoned investors in contrast are being tempted to hold on for the long term after noting that demand for rental homes is rising, and with it the opportunity to increase rent prices. This is especially welcome after the interest rate hikes over the last 18 months forced many landlords to dip into their own pockets when rental yields have fallen short of the amount needed to cover their mortgage.
However, this seems to be changing as fears of house price falls are fuelling the rush into rental properties, as owner-occupiers adopt a ‘wait and see’ attitude before investing their money. According to Savills, rent increases will reach 10 per cent this year across the country, and are expected to rise at a similar rate next year.
Stuart Law, chief executive of property investment specialists Assetz highlights further positives with the new CGT tax laws, “ The new 18 per cent flat rate does apply from day one, and there is still an opportunity to avoid paying tax at all by rolling over the profits on the sale into another business asset under the rollover-relief provisions."
"As an investor owes tax on the sale price of a buy-to-let property, less the original purchase price, those who have refinanced well above the purchase price have previously found themselves potentially owing more tax than the remaining equity in the property – a little known capital-gains tax-trap," he said.
"From April 2008, with the new lower rate of 18 per cent, many investors could find it easier to sell the property they have refinanced so aggressively over recent years without incurring a tax bill greater than the equity they release through the sale."
So, whether you are in it for the short term or long term, the changes announced by Chancellor Darling are good news for investors who will no longer have to hold on to assets for long periods to benefit from taper relief. And if the property market remains stable for the moment, some property investors will be tens of thousands of pounds better off if they decide to sell their property after 1 April 2008. Even if investors decide to ride out the market uncertainty the opportunity to maximise and profit from their rental yields leaves landlords in a win-win situation.
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This article was first published on Simply Business