There has been talk of buy-to-let investors selling part of their portfolio to take advantage of the existing capital gains tax (CGT) regime before the changes are introduced in April 2008, however, this maybe a little hasty and they could well be better advised to wait.
The only investors who would benefit from selling before April 2008 are those who have owned their investment property for at least 10 years and are basic rate taxpayers now – and would still be basic rate taxpayers after having realised any buy-to-let gains.
This is because non-business taper relief reduces the effective rate of CGT to 12% after 10 years for a basic rate taxpayer, 24% for those who pay at 40% – which is likely to be the majority of investors. But the new flat rate CGT charge will be 18%.
Taper relief broadly reduces chargeable gains according to the period of ownership – that is the number of whole years for which the asset has been held after 5 April 1998 – and whether the asset disposed of is a business or non-business asset.
Non-business assets such as buy-to-let properties receive no taper relief until year 3 of a 10 year maximum holding period. The rate of relief thereafter is 5% per annum, up to a maximum of 40%. Full non-business asset taper relief therefore results in an effective CGT rate of 24% for an individual who is a higher rate taxpayer or 12% for a basic rate taxpayer (ignoring the annual CGT exemption).
Because CGT is applied as the top slice of your income, most property owners realizing gains are going to be higher rate taxpayers paying CGT under the existing rules at an effective rate of at least 24%. This is higher than the new flat rate of 18% which will apply after 6 April of next year.
And even very long term holders of buy-to-let properties who stand to lose not only taper relief but also indexation up to 1998 when indexation was replaced with taper relief, will have to have owned their properties for a very long time before they will be worse off.
Take for example, someone who bought a property in April 1988 for £100,000. Inflation as measured by the RPI which went from 105.8 in April 1988 to 162.6 in April 1998 was therefore 53.6%. Under the existing rules the acquisition price would be uprated to £153,600.
If they sell before 5 April 2008 for £400,000 their profit is £246,400 and their liability to CGT at an effective rate of 24% after 10 years taper relief is £59,136. Under the new rules after 6th April 2008 their profit will be £300,000 taxed at a flat rate of 18% which works out at £54,000. It makes no sense to sell just to take advantage of the existing rules.
Posted: 12th October 2007