How will the new capital gains tax changes in 2008 affect me?
30th October 2007
Reader Writes:
You mentioned in the column last week that capital gains tax (CGT) will change in 2008. I have a buy to let property and I was thinking of selling it. Am I better to do it now, rather than after April 2008?
Each person will have to do their own calculations and I recommend you contact your accountant sooner rather than later.
Much of the decision on whether or not to sell the asset now will depend on whether or not the asset you own is a business asset, and of course how long you have owned it.
For business assets, the new rules are not favourable. Although the tax is set at 18% after utilising the capital gains allowance of £9200, other allowances such as taper relief are no longer available.
Currently if you own a business asset for longer than two years 75% of the gain disappears through business asset taper relief. This is fantastic. For most, this would bring the effective rate of tax down to a maximum of c10%.
Under the new rules you will be hit with 80% more tax at the new flat rate of 18%. This is colossal and you should seek advice quickly. It is probable that you should offload this asset now.
You need to be clear if your asset is a business asset or not, as that will determine the urgency. For example a furnished holiday let would attract business taper relief but a buy to let property will probably not.
A non business asset would attract tax at a different rate. For instance under the current regime you qualify for relief on the gain at 5% per year for a maximum of ten years but the first two years are excluded. So if you owned a second property for five years and sold it you would benefit at 15% relief on your gain. After ten years, 40% of the gain (the maximum) is wiped out.
After April 2008 you will no longer have any of the above taper relief and all the gain is taxed at 18% irrespective of your tax position.
Naturally you and your spouse both have an annual CGT allowance of £9200. Any gain you make on joint assets will be split, and the CGT allowance above is taken away from it to decide what taxable gain you will have.
I ran a number of calculations through for non business assets that had been held for five and ten year periods and the results are interesting.
For higher rate tax payers who own non business assets, the news is pretty good as they should see an effective drop in the tax after April 2008.
For basic rate tax payers, the news isn’t so hot, as the rate, after allowing for the loss of taper relief, is worse, and they could well be forced into offloading this asset before April 2008.
If you are a basic rate tax payer who has held a non business asset for six years or more you should seek advice as the loss of taper relief may mean you are worse off after April 2008.
So where does this leave the housing market? Well, consider the already slowing commercial market and also the housing market. It's fair to say that all those who are in any of the situations above who need to offload, will certainly consider doing so. In an environment where demand is reducing and supply would increase, you should expect the price of that asset to fall.
If the momentum gets going the stampede would not be favourable for the market at all.
As a quick reminder, don’t forget that gains you make on the property can also be offset against losses elsewhere such as any unit trusts etc.
Indexation relief, the kink test, halving relief as well as taper relief will all be abolished for any asset disposed of after the 6th of April 2008 so consider advice from your advisers quickly.
If you have a tax query call Peter on 0845 230 9876 or e-mail info@wwfp.net.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Reader Writes:
You mentioned in the column last week that capital gains tax (CGT) will change in 2008. I have a buy to let property and I was thinking of selling it. Am I better to do it now, rather than after April 2008?
Each person will have to do their own calculations and I recommend you contact your accountant sooner rather than later.
Much of the decision on whether or not to sell the asset now will depend on whether or not the asset you own is a business asset, and of course how long you have owned it.
For business assets, the new rules are not favourable. Although the tax is set at 18% after utilising the capital gains allowance of £9200, other allowances such as taper relief are no longer available.
Currently if you own a business asset for longer than two years 75% of the gain disappears through business asset taper relief. This is fantastic. For most, this would bring the effective rate of tax down to a maximum of c10%.
Under the new rules you will be hit with 80% more tax at the new flat rate of 18%. This is colossal and you should seek advice quickly. It is probable that you should offload this asset now.
You need to be clear if your asset is a business asset or not, as that will determine the urgency. For example a furnished holiday let would attract business taper relief but a buy to let property will probably not.
A non business asset would attract tax at a different rate. For instance under the current regime you qualify for relief on the gain at 5% per year for a maximum of ten years but the first two years are excluded. So if you owned a second property for five years and sold it you would benefit at 15% relief on your gain. After ten years, 40% of the gain (the maximum) is wiped out.
After April 2008 you will no longer have any of the above taper relief and all the gain is taxed at 18% irrespective of your tax position.
Naturally you and your spouse both have an annual CGT allowance of £9200. Any gain you make on joint assets will be split, and the CGT allowance above is taken away from it to decide what taxable gain you will have.
I ran a number of calculations through for non business assets that had been held for five and ten year periods and the results are interesting.
For higher rate tax payers who own non business assets, the news is pretty good as they should see an effective drop in the tax after April 2008.
For basic rate tax payers, the news isn’t so hot, as the rate, after allowing for the loss of taper relief, is worse, and they could well be forced into offloading this asset before April 2008.
If you are a basic rate tax payer who has held a non business asset for six years or more you should seek advice as the loss of taper relief may mean you are worse off after April 2008.
So where does this leave the housing market? Well, consider the already slowing commercial market and also the housing market. It's fair to say that all those who are in any of the situations above who need to offload, will certainly consider doing so. In an environment where demand is reducing and supply would increase, you should expect the price of that asset to fall.
If the momentum gets going the stampede would not be favourable for the market at all.
As a quick reminder, don’t forget that gains you make on the property can also be offset against losses elsewhere such as any unit trusts etc.
Indexation relief, the kink test, halving relief as well as taper relief will all be abolished for any asset disposed of after the 6th of April 2008 so consider advice from your advisers quickly.
If you have a tax query call Peter on 0845 230 9876 or e-mail info@wwfp.net.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
'Your home may be repossessed if you do not keep up repayments on your mortgage'.
'Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. Worldwide is entered on the FSA register www.fsa.gov.uk/register/ under reference 440668
Registered office; The Old Carriage Works, Moresk Road, Truro, Cornwall, TR1 1DG. Registered in England and Wales No. 3533548. Contact info@wwfp.net or 01872 222 422
© 2007 Worldwide Financial Planning - this site is intended for UK investors only
By clicking on any of the external links within this website you will leave the regulatory site of Worldwide Financial Planning Ltd. Worldwide Financial Planning Ltd are not responsible for the accuracy of the information contained within the linked sites.'
'Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. Worldwide is entered on the FSA register www.fsa.gov.uk/register/ under reference 440668
Registered office; The Old Carriage Works, Moresk Road, Truro, Cornwall, TR1 1DG. Registered in England and Wales No. 3533548. Contact info@wwfp.net or 01872 222 422
© 2007 Worldwide Financial Planning - this site is intended for UK investors only
By clicking on any of the external links within this website you will leave the regulatory site of Worldwide Financial Planning Ltd. Worldwide Financial Planning Ltd are not responsible for the accuracy of the information contained within the linked sites.'