New Capital Gains Tax Rules
How They Affect You

By Carl Bayley BSc ACA

New Capital Gains Tax Rules - Our new Darling Chancellor’s first Pre-Budget Report, delivered on 9th October 2007, has caused quite a stir in the UK property taxation world.

The biggest news is undoubtedly the shock announcement of a new single flat rate of Capital Gains Tax. The new rate of 18% is to apply to all capital gains arising on or after 6 th April 2008.

And it isn’t just a new rate of tax. Effectively, from 6 th April 2008, we will have a whole new and much simpler Capital Gains Tax regime. The new flat rate system will replace the taper relief regime introduced by Gordon Brown in 1998. From next April, we will no longer be concerned with how long an asset has been held or whether it qualifies under the rather tortuous ‘business asset’ rules – the flat rate of 18% will apply to everything.

In the immediate aftermath of the Pre-Budget Report, early commentators were swift to remark on what good news this was for property investors. The new rate of 18%, they argued, was an improvement on the effective long-term rate for sales of non-business assets by higher rate taxpayers holding property for ten years or more: 24%.

However, as is usually the case in the tax world, things are not so simple in every case.

Sure enough, most higher rate taxpayers selling residential property after 6 th April 2008 will benefit under the new flat rate regime. But many other investors are set to lose out.

The abolition of taper relief means that the ability to benefit from an effective Capital Gains Tax rate of just 10% after owning qualifying business assets for just two years will disappear. Since 2004, most commercial property has qualified as a business asset for taper relief purposes. The effective tax rate on sales of this property after 6 th April 2008 will almost double from 10% to 18% in many cases.

Qualifying furnished holiday letting accommodation also currently qualifies as a business asset for taper relief purposes. The tax rate on sales of these properties will also increase next April.

Another group of people who may lose out are basic rate taxpayers. The new flat rate of 18% applies to everyone regardless of their income level. A basic rate taxpayer selling a property held since before 17 th March 1998 would currently pay Capital Gains Tax at an effective rate of just 12%. After 6 th April 2008, this increases by a factor of a half, to 18%.

In fact, any basic rate taxpayer selling property which they have owned for five years or more may be worse off under the new flat rate regime.

Example

Alistair is a property investor with a modest portfolio of properties. His portfolio produces a small rental loss each year and he lives off a salary of £10,000 from a part-time job which he augments by re-mortgaging the properties in his portfolio.

Alistair now wishes to sell a buy-to-let property which he bought in October 1998. He expects to realise a gain of £60,000 after taking account of selling expenses, etc, and is unsure whether the sale will take place before or after 6 th April 2008.

Alistair’s tax position on a sale before or after the new flat rate comes into force may be compared as follows:

	Before	After
Gain on sale of property	60,000	60,000
Less: Taper relief @ 35% (9 years)	21,000	-
	-	-
Annual exemption	39,000	60,000
	9,200	9,200
	-	-
Taxable gain	29,800	50,800
	-	-
Capital Gains Tax @ 20%/18%	£5,960	£9,144

As we can see, in this example the investor will be more than £3,000 worse off if the sale takes place under the new flat rate regime.

On the other hand, of course, if Alistair were a higher rate taxpayer, currently paying Capital Gains Tax at 40%, he would be nearly £3,000 better off under the new regime. There are winners and losers here and you need to know which one you are!

Other potential losers

Many higher rate taxpayers currently save Capital Gains Tax on property disposals by making a pre-sale transfer of a part interest in the property to their basic rate taxpayer spouse or civil partner. This planning will be much less effective under the new regime.

Many properties currently have a partial entitlement to business asset taper relief, such as a mixed use building with a shop on the ground floor and flats above. The change to a flat rate will increase the effective rate of tax on the business part of the property.

Properties purchased before April 1998 currently attract indexation relief. For older properties held since March 1982, indexation relief amounts to 104.7% of the property’s value at that time. Indexation relief will also be abolished with effect from 6 th April 2008 meaning that the gain on some older properties will be significantly increased.

Planning for the new regime

The new flat rate regime will produce winners and losers and anyone contemplating a sale in the near future would be well advised to give some consideration to whether they want their sale to go through before or after 6 th April 2008. As a final word on this subject, remember that the date of sale for Capital Gains Tax purposes is the date on which there is an unconditional sales contract; this may be some time before completion in many cases.

Other news in brief

The change to the Capital Gains Tax regime is by far the biggest news for property investors. A few other points are, however, also worthy of a brief mention:

• The nil rate band for Inheritance Tax (currently £300,000) has been made transferable between spouses and civil partners. This welcome measure was given immediate and retrospective effect, so that widows, widowers and surviving civil partners begin to benefit straight away.
• The proposed Planning Gain Supplement due for introduction in 2009 has been scrapped in favour of a planning charge on all new developments.
• Emigration for tax purposes is to be made more difficult, as days of arrival and departure will be counted in the ‘91 day test’ from next April.
• Non-UK domiciled taxpayers resident in the UK for seven years or more will either have to pay tax in full on their overseas income and capital gains or face an annual charge of £30,000 from 2008/9 onwards. All non-UK domiciled taxpayers will also lose entitlement to their personal allowance if they continue to claim their current exemption on unremitted overseas income of £1,000 or more after 6 th April 2008.