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2004 budget tax implications for property investors by Ian McTernan

By Ian McTernan - Author of ‘How to use companies to cut your property tax bills’

As usual, a speech by the Chancellor is full of fine words and very short on detail. However the devil in the press releases was issued by the Revenue immediately after he sat down.

In total there are 43 this year, which must be a record!

Many of the press releases issued by the Revenue deal with technical aspects which are not of interest to the general public.

However, of interest to the many property investors are the following:

Tax-free dividends abolished for small companies
The promised attack on small companies paying out dividends instead of salary has been realised, with a minimum corporation tax rate payable of 19% on distributed profits.

What this means is that if the company pays out all it's profits in dividends then the 0% band for corporation tax does not apply.

This results in additional tax being payable by the company of up to £1,900. It is not clear at this stage exactly how this will be applied in practice.

This measure will affect mainly small service companies and others who have managed to escape the clutches of IR35, together with any small trading companies that no not need or choose not to retain any profit within the company.

Watch out for Pre-owned assets
The threatened tax on so-called 'pre-owned' assets is going ahead with a few minor alterations.

This will apply a charge to tax on the deemed rental value of a property where the property has been gifted or sold for an undervalue.

A typical example is where the parents gift their property to their children to avoid IHT, but continue to live in it. This tax will apply from 6th April 2005, but will be applied to all property transferred since 18 March 1986.

It does not apply to properties that were transferred at full market value and paid for in cash.

Registration of tax avoidance schemes
Whilst not going in for a fully-fledged general anti-avoidance rules, the Revenue have introduced rules so that promoters of tax avoidance schemes will have to provide full details of the schemes shortly after they are sold, and each scheme will be allocated a reference number.

Taxpayers will then have to enter the scheme number on their Tax Return. In house and other schemes will have to be disclosed to the Revenue and full details given. As usual, there will be a system of penalties for those that fail to follow the rules and I expect this will be enforced!

Income Tax and CGT Tax Bands
On a more general level the rates of allowances and tax bands for individuals have been raised in line with inflation with the exception of the childcare element of the working tax credit and the income thresholds for tax credits, so in effect the value of the benefit has been slightly reduced.

Corporation Tax bands
For companies, there is again no change in the bands for corporation tax rates so once again companies will suffer a tax increase in line with an increase in profits purely due to inflation.

No Change to Stamp Duty
Stamp duty rates and bands were unchanged, which means with house price inflation currently around 15% per annum this tax will raise even more money for the Government next year and more people will find themselves in the higher rates for stamp duty as a consequence of house price rises.