Taper Relief Confusion!

I'm totally confused about Taper Relief.

I bought a second home in October 1996. It's a non-business asset. I understand that the taper relief is increased by 1 year for assets held before 5/4/98.

In my situation, does this mean that I reach maximum taper relief of 40% if I sell the house after 5/4/2006?

Also, I've searched but not found this - is there such a thing as a CGT calculator that takes into account indexation prior to taper releif and does a rough cgt calc?

Any pointers appreciated.

Try

for a start, then for more information.

Thanks for the pointers Terry, very much appreciated.

I had already found the information and as I said I was confused by it. I had calculated as I said that I thought the rules indicated that I acheived maximum relief for my purchase in October 96 if I disposed after 5/4/2006. I was hoping someone that knew about these things could merely confirm I'd understood the rules correctly.

Thanks again

SD

In message , Sharon Derben writes

You get indexation relief from Oct 96 to Mar 98, then taper relief from Apr 98 onwards. The 'number of years held' for taper purposes is the number of complete years starting 4/98.

Are you sure it's that simple? A bonus year is mentioned for holdings before 4/98. Thats why I've been asking whether my calculations are correct.

Yes, it is that simple. Alas, your calculation is off by 1 year.

In effect you get 5% taper relief for each complete year after

05/04/98 except that the first two such years don't count.

For maximum 40% relief an asset must have been held for at least 8 years which count, which in general means 10 years after 04/98.

You get a "bonus year" for assets held prior to ??/03/98 (when the scheme was announced).

You can think of the bonus year as either increasing the number of years which count by 1, or reducing the number of years which don't count from 2 to 1, but not both.

If you qualify for the bonus year, then maximum relief is achievable one year earlier than without. Thus you need to hold the asset for

9 years after 04/98 instead of 10.

To get maximum relief in bonus-year circumstances, the sale would have to take place on or after 6th April 2007, because 1998+9 07.

In message , Sharon Derben writes

Yes it is that simple, and you DO get the bonus year because you acquired the asset before 17 March 1998.

If you bought in Oct 96 then the indexation allowance was .057 (according to terry's link) This means you multiply the purchase price by 1.057 giving the indexed purchase price - P.

If you were to sell today there would be 8 full tax years since April

1998 plus one bonus year making 9 full years making 35% relief.

You then deduct the indexed purchase price from the net sales proceeds to obtain the 'gain'. You then reduce the gain by 35%. You then deduct the annual allowance of £8500 and if there is anything left this is taxed. In order to determine the rate of CGT that you pay, the taxable gain is added to your current years taxable income and taxed as though it was the 'top slice', so if you were a basic rate income tax payer the first part of the gain up to the threshold for the higher rate would be taxed at basic rate and the remainder at 40%

I suppose living in the future is one way of rebutting hypothetical accusations of being an old-timer living in the past, but I suggest it might have the unwanted side-effect of being labelled a loony.

Actually there would be only 7 full years, unless you're using "today" as an abbreviation for "about three and a half weeks from today".

Also the number of tax years is irrelevant. Qualifying years are just whole years starting on any old day. An asset bought on 1st June 2001 and sold on 3rd July 2004 would have been held for (a little over) three whole years for taper relief purposes, even though that period only contains two whole tax years.

Of course in the case of assets acquired prior to 6/4/98, a holding period of any number of whole years will ipso facto, but only coincidentally, also contain the same number of whole tax years.

Happy New Year! (Oops)

Yes!! Quite right!

Ah! But not in this case.

Ah yes, thats the point! Any asset acquired under the old regime will need to have been held for full tax years!

And happy birthday! (Perhaps i can use the above to make myself appear somewhat younger........ perhaps if age were to be counted in tax years, not actual years..... perhaps...............

Many thanks for all the help. Such a simple concept defeated me - but it looks like I'll be keeping this until after 4/98.

To make sure I have understood all that was said (some of what was posted I think might be clear to those whop already understand it but moi .......) ...........

If I bought the asset in October 96, does the maximim relief occur if I sell it after 6/4/07 or after say October/07?

Many thanks.

SD

After 5/4/07, that is to say on or after 6/4/07.

It doesn't matter how long you've actually owned it in total (well, that's not quite true, but it is true when looking only at taper relief); taper relief only applies to years from 6/4/98, when the taper relief regime came in and replaced the indexation allowance regime.

By the way, tax minimisation is not the be all and end all. The aim of the game is to maximise your after-tax proceeds.

Whilst waiting an extra year will give you the 8th and final 5% tranche of TR, you need to look at the whole picture. If there is reason to suspect that the property might not sell as easily or for as much money next year than this year, there is a possibility that although there will be less tax to pay next year, you'd still end up with less money.

For example, suppose you bought the place for £97k plus other costs (survey/solicitor fees, stamp duty, etc) of £3k. Suppose the personal CGT exempt amount (which is £8500 for 2005/06) is £8.8k for 2006/07 and £9.1k for the year after. Suppose you could sell it next month for £200k net (e.g. £205k less estate agent's cut of £5k), but if you waited until next year you could only get £190k net.

Case 1: Sell this calendar year (but next tax year, i.e. next month)

Raw gain is 200k - 100k = 100k Less indexation allowance of 5.7k gives indexed gain of 94.3k Less 35% taper relief of 33k gives tapered gain of 61.3k Less exempt amount 8.8k leaves amount subject to CGT of 52.5k Suppose your income is such that 10k of this taxable at 20% and the rest (42.5k) at 40%, then your tax bill will be 2k + 17k = 19k and this leaves 200k - 19k = 181k in your pocket.

Case 2: Sell one year later

Raw gain 190k - 100k = 90k Less IA of 5.7k gives 84.3k Less 40% TR of 33.7k gives 50.6k Less EA of 9.1k gives 41.5k

10k at 20% and 31.5k at 40%: 2k + 12.6k = 14.6k Cash proceeds: 190k - 14.6k = 175.4k

So you see that even though you're paying £4400 less tax you still end up with £5600 less money in your pocket. Moreover, this year's

181k, put into a bank earning 4.5% interest (3.6% net) will be worth 187.5k next year, so your shortfall due to waiting would be 12.1k.

Case 3: As case 2 but sell for 210k

Raw gain 210k - 100k = 110k Less IA: 104.3k Less 40% TR of 41.7k gives 62.6k Less EA of 9.1k gives 53.5k

10k @20% and 43.5k @40%: 2k + 17.4k = 19.4k In hand: 210k - 19.4k = 190.6k

This is only £3100 more than next year's value of the case 1 proceeds, despite getting £10k more from the sale, and despite getting £8700 more taper relief.

If you really want to cut your tax bill, make the place your main home before selling it. But seeing as you would only save of the order of £19k you may not think the hassle worth while.

True, it could make you appear almost two years younger. If your birthday were 7th April, then on 4th April (3 days before your 62nd birthday) your tax age would still be 60.

Thanks very much Ronald for taking so much trouble.

The property will near enough always sell well. It's a prime postion sea-edge property that has increased in value by 13% compound for the last

10 years.

I've spreadsheet this and it seems to me that as an investment it makes sense to keep it for as long as I can.

In a year or so I've earned maximim taper relief which essentially means that after our joint annual cgt allowance is pooled (we're joint owners), we will only ever accumulate a potential liability of 40% of 60% ie 24% of any gain. My calculation is that if I sold in a year or so, I'd pay roughly

50k cgt on a current value of around 360k. As I'm a relatively cautious investor, early retired, it seems that the capital appreciation rolling up in this second house is better than I could do if the cash were in the bank, and I can use it as well. The compound effect means that in a way it's providing a net increase in capital of approximately 30k per year which compounds up sharply. 10 years from now, if property prices increase by 10% average each year, my net annual gain could be around 60k after any cgt that might be paid. If I made the mistake of getting itchy feet and sold and bought somewhere else, I'd be realising the CGT obligation traight away, and starting on the taper relief ladder from scratch. Because of buying, selling and stamp duty costs - as well as the cgt hit the replacement property would be cheaper than my current one. The start again with taper relief means I should then really be locked in again. So everything points to simply enjoying the property until I NEED to sell it.

Thanks again for your time.

SD

"Ronald Raygun" wrote

... but your "real age" would be only

*61*, hence only *one* year different. [When only counting **whole years** for both. It cannot be fair to count part-years for "real age" and only whole years for "tax age"!!]

Unless you count part-years for both, in which case.......... ;-)

Well, I did say *almost* two years.

Oh yes it can. Tax is unfair, so it's fair to be unfair back.

I wonder how old old JB really is. In fractional years, whole years, tax years, I don't care, a ball park figure will do. I suspect 62 isn't far wrong, which would make him

*much* older than me.

In message , Sharon Derben writes

IIRC, it tends towards 5% compound

In message , Sharon Derben writes

Sharon, have you thought of moving into the second house and living there for a bit? Even if only nominally?

Many thanks John,

I thought that the acceptance of a house as a principal residence had a couple of conditions:

1. the property must not have been purchased for the sole reason of making a profit and

1. that to be exempt the house must be an individual's only or main residence throughout the period of ownership

If this is correct I'd fall foul of (2) if I were unable to prove genuine occupation, by for example turning all heat and electric off our genuine main house and turn everything on in the second smaller house to produce some utility proof. There is no chance of a genuine real move to the second home so I think it's a dead dog but thanks for the thought

SD

In message , Sharon Derben writes

My book has different definitions.

1) A dwelling house (or part of it) which is, or has has at any time in the period of ownership been, his only or main residence or 2) land which... (not relevant)

see