Burden lifted from owners of second homes
Financial Times Published: October 12 2007 17:46 | Last updated: October 12 2007 17:46
Owners of buy-to-let properties and second homes are set to be big winners from the radical simplification of capital gains tax (CGT) announced in this week¹s pre-Budget report.
The introduction of a single 18 per cent CGT rate from April 6 could mean tax savings of thousands of pounds when these property owners come to sell and in some cases more than halve their tax bills.
For private investors the chancellor¹s reform of this notoriously complex tax is generally good news, say experts, although employee shareholders and long-term owners of farmland and other assets are among those who could be hit by the overhaul of tax on profits.
On the face of it, the new flat rate looks like a tax cut for investors. Currently, CGT on most holdings is levied at 40 per cent for sales in the first three years of ownership, tapering to a minimum of 24 per cent after
10 years of ownership.But the picture is complicated by gains on some investments currently being taxed at rates of just 10 or even 5 per cent as ³business assets².
In addition, profits on holdings bought before 1998 benefit from indexation allowance, which reduces the amount of gains that are subject to CGT.
The sliding scale of CGT rates known as taper relief and indexation allowance are now being scrapped. And the combined result of this is that while many investors stand to gain, some could face substantially higher CGT bills on sales after April.
John Whiting, tax partner at accountants PricewaterhouseCoopers, says of the profits tax overhaul: ³It¹s the proverbial curate¹s egg you have to look carefully at which part of the egg you¹ve got [to see whether it¹s good]².
Richard Proctor, tax partner at accountants Grant Thornton, adds: ³Generally, the change is extremely good news for property owners and very short-term holders are undoubtedly big gainers.²
Buy-to-let investors and second home-owners who have bought in the property boom of recent years could be sitting on substantial gains currently taxable at rates as high as 40 per cent if they sold. So, for owners thinking of selling, it is a ³no brainer² in tax terms to delay until after April when the 18 per cent rate comes in, says Proctor.
³Those who are really pessimistic on property prices will need to do their sums [to see whether they should sell before April anyway]. But prices would have to drop a lot to offset the tax savings [of waiting].²Ray Boulger, senior technical manager at John Charcol mortgage brokers, reckons that some nervous property owners might look to agree sales before April but defer completion until after then to benefit from the CGT change.
Proctor even suggests that the resulting reduction in the supply of properties to the market over the next few months could act as ³short-term prop to prices², although housing analysts say that any short-term market distortion is likely to be marginal.
In some cases, however, properties are subject to a CGT rate of just 10 per cent at present for example, where they are deemed ³furnished holiday lets² for short-term rental. From April, selling will mean tax at the new 18 per cent rate.
Likewise, the removal of indexation allowance could push up tax bills for many long-term owners of property and other assets. Proctor says that longstanding owners of farmland could currently face no CGT at all because indexation has wiped out any increase in land values. From April, though, they would face tax on what could be large gains. This, in turn, could bring forward transactions and potentially have an adverse effect on prices.
But, for many shareholders, the new 18 per cent CGT rate may be less important, suggests PWC¹s Whiting: ³In general, shareholders don¹t pay CGT anyway the typical bill is nil.²
This is because investors already have a range of tools for avoiding the tax on shares, including tax shelters such as Isas, the £9,200 annual capital gains exemption, and the ability to offset losses against gains.
Nevertheless, employee shareholders and Aim investors will face higher potential CGT bills, following the abolition of preferential CGT rates for business assets.
Ifs ProShare, which promotes Save As You Earn and other employee share schemes, says that higher-rate investors could be 8 per cent worse off in tax terms from April, given their current CGT rate of 10 per cent after two years. Basic-rate employee shareholders, given their current rate of just 5 per cent, could lose out even more. This contrasts with a potential gain of
22 percentage points for non-employee shareholders, whose tax rate could fall from 40 per cent on the gain to the flat rate of 18 per cent.Greg Limb, director in the private client team at KPMG, describes as ³bizarre² the removal of a favourable tax regime for employee shareholdings.
³Many listed companies will feel sore that there will be no incentive for them to encourage their staff to hold their shares,² he says.Aim shares also lose out from this CGT change but, for many investors their main attraction remains inheritance tax mitigation and so these are often held for the long term (see Page 5). So a wholesale market sell-off is unlikely.
However, the loss of taper relief for holding shares longer could lead to investors trading shares more frequently. Paul Killik, senior partner at stockbrokers Killik & co, added: ³It will lead to many choosing to sell investments when it¹s right to do so rather than holding on to investments in order to avoid a penal 40 per cent tax. The market will therefore become much more liquid.²
Some financial advisers suggest that the generally lower rate of CGT may also prompt the launch of more investment products providing returns that are subject to CGT than income tax.
Paul Willans, partner at advisers Mazars says: ³This will be manna from heaven for the UK¹s investment industry... [it could mean] canny investors need never pay more than 18 per cent tax on their investment portfolios.²