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UK Property Tax Portal
Tax Articles
The pre-budget report from Alistair Darling in early October was heralded as a budget for residential property investors. Why? Because one of the main headlines was that the capital gains tax rate from What this means is that people who have been investing in property and have been concerned at paying capital gains at a whopping 40% have been relieved of this pain – if they sell on or after Actually, to be more to the point, the 18% flat rate would be payable if contracts are exchanged on or after Giving with one hand and taking with the other Although the reduction to 18% represents a capital gains tax saving of over 50%, it is important to understand that the Chancellor has also proposed removing two reliefs that would benefit longer term investors. These are: Indexation relief: a relief that is available for properties that were purchased before Non-business taper relief: a relief that became effective on The amount of relief available is dependant upon the period of property ownership. Taper relief starts once you have owned the property for a minimum of three years and increases to a maximum of 40% of the gain after 10 years. So who are the real winners? Well, it is certainly a real tax saving proposal for people who have started investing in residential property over the past few years, which probably includes the majority of buy-to-let investors. Let’s look at an example of the traditional buy-to-let investor. Case Study John buys a residential property in March 2002. He is a 40% tax payer. The property purchase price is £120,000. In September 2007 the property is valued at £180,000. This means he has made a £60,000 capital gain. But what is his property tax liability if he sells now at this price? Capital gains tax liability if selling the property in the current tax year If he sells now, he won’t be eligible for indexation relief, as the property was not purchased before However, he will get a non-business taper relief benefit. This is because he has held the property for five whole years and this will bring down his taxable rate from 40% to 34%. Therefore, the property tax liability (excluding annual CGT allowance) would be: £60,000 (gain) x 34% (effective rate after non-business taper relief) = £20,400 The capital gains tax liability would be £20,400 Capital gains tax liability if selling the property in the following tax year If he waits until the following tax year, the tax liability (excluding CGT allowance) would be: £60,000 (gain) x 18% (flat rate capital gains tax) = £10,800 Conclusion Should he sell now or should he try to hold out until at least As you will already have realised from the calculations above, there is a significant tax saving by not selling the property untill the following tax year, i.e. until the new capital gains tax flat rate is introduced. But what about long-standing property investors? Even though the buy-to-let market has boomed over the past few years, there are a good number of investors who originally invested in the early 1990’s or even earlier. Will they pay less in property taxes if they sell now, or if they sell in the following tax year? Well, the fact is that by waiting until next year, they will definitely miss out on indexation relief and probably the maximum amount of non-business taper relief. Let’s look at the following case study: Julie buys a property in May 1988 for £35,000. The property is now valued at £160,000. She has made a whopping £125,000 capital gain. She is also a 40% tax payer. Capital gains tax liability if selling the property in the current tax year What is CGT liability if she sells before the proposed budget changes come into effect? Indexation relief = £18,585 Non-business taper relief = Full 10 years reducing rate to 24% This means that Julie’s tax liability (excluding CGT allowance) would be as follows: £125,000 (gain) - £18,585 (indexation relief) x 24% (non-business taper relief) = £25,540 Therefore, her tax liability would be £25,540 if the property was sold in the current tax year. Capital gains tax liability if selling the property in the following tax year The capital gains tax liability if the property is sold on or after £125,000 (gain) x 18% (flat rate capital gains tax) = £22,500 So which produces the bigger tax saving? Once again, in this particular instance, the investor would make more of a tax saving by waiting until the following tax year. In this particular case she would make a £3,040 tax saving. However, it is no where near as significant as the tax saving made by the more recent property investor! Conclusion There is real significance in the statement “this was a pre-budget for property investors." As we have seen in both the case studies above, holding out until the next tax year, when the flat rate tax of 18% is introduced, will bring about a tax saving for both the more recent investor and the long term investor.
However, the saving for the newer investor is far greater than for the more established investors.
Having said this, if you are considering making a sale this year or early next year then you should make a CGT calculation to determine how much tax you will be liable to pay. What I am hearing more and more from investors is that the 18% flat rate capital gains tax payment is now “bearable”. Everyone hated the thought of giving 40% of their hard earned profits to the tax man, but this will no longer be the case from About Arthur Weller
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Arthur Weller is a Chartered Tax Advisor (CTA) and an integral part of the Property Tax Portal team. He offers a special rate