Capital Gains Tax Changes

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

The biggest news was 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 6th April 2008.

And it isn’t just a new rate of tax. Effectively, from 6th April 2008, we will have a whole new and much simpler property tax regime. The new flat rate system will replace the taper relief regime introduced by Gordon Brown in 1998. From 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 6th 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 6th April 2008 will almost double from 10% to 18% in many cases.

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 17th March 1998 would currently pay capital gains tax at an effective rate of just 12%. After 6th 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.

-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.

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 6th April 2008.