Property ownership and capital gains tax
New capital gains tax rules were announced in October’s Pre Budget Report. Under draft legislation awaiting Royal Assent, with effect from 6 April 2008, all gains in excess of the annual exemption will be taxed at a flat rate of 18%.
The old rules which were familiar to most taxpayers, included indexation relief for assets acquired between March 1982 and April 1998, and a sliding scale of relief known as taper relief introduced in April 1998. Both these reliefs came to an end on 5 April 2008.
How do the new rules impact on property owners?
The position has not changed where a property is the taxpayer’s only or main residence (PPR). Gains arising on such a property together with land up to half a hectare, or more where the additional land can be justified, are exempt from capital gains tax (CGT).
The exemption also applies for the last 36 months of ownership even if it is strictly no longer occupied as the taxpayer’s PPR. There are a number of other absences which still attract the exemption, and perhaps the most useful of all is the residential lettings exemption. This applies where a property once occupied as a taxpayer’s PPR is let for residential accommodation. A relief of up to £40000 may be available to each of the owners of such a property, so that married couples or civil partners may be entitled to claim up to £80000.
However, the above reliefs are not available where a property has been purchased with the purpose of realising a profit, which is the situation for most Buy To Let (BTL) investors. So how do they stand under the new rules?
For many investors who purchased property within the last 3 or 4 years, the new rules are likely to be of benefit. There would have been no indexation available on an asset bought post-April 1998, and no taper on any asset bought on or after 6 April 2005, so a disposal before 5 April 2008 would have been taxed at a rate somewhere between 20% - 40% of the gain in excess of the annual exemption, depending on the taxpayer’s overall tax position. However, disposals since 6 April 2008 attract a tax rate of 18%. The “losers” under the new rules are long-term BTL investors
Indeed, the new capital gains rules will adversely affect many long term investors on other assets. However, those who have invested in commercial property may be able to defer any gains by means of rolling-over into new assets which qualify, or may under certain circumstances be able to take advantage of the new Entrepreneurs Relief. It is also possible to gift property into Trust and hold over the gains arising, but this may have other tax implications.
In all cases, taxpayers are advised to take relevant professional advice, as there is no universal panacea and no “one cap fits all” solution.
April 2008
This article gives a general overview only and the legal position at the time of writing this article. It cannot be relied upon in any particular case. Specific legal advice must always be considered to include consideration as to whether the legal position contained in this article has changed since going to print. For further information and advice, please contact Deirdre Moss or Gail Leece on 01793 527141 or alternatively by email on Deirdre.Moss@lemon-co.co.uk or Gail.Leece@lemon-co.co.uk.
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<p><strong><a href="http://www.lemon-co.co.uk/article_property-capital-gains.php">Property ownership and capital gains tax</a></strong><br />
New capital gains tax rules were announced in October’s Pre Budget Report. Under draft legislation awaiting Royal Assent, with effect from 6 April 2008, all gains in excess of the annual exemption will be taxed at a flat rate of 18%...</p>
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