Capital Gains Tax up to 40%!

MrEnglish

the new coalition has just said that Capital Gains Tax (CGT) on second homes will be hiked from 18% to 40% after the next Budget. Buy-to-let loans have already fallen 15% in 2010's first quarter, says the CML. This post-election CGT news will hit buy-to-let players harder, and has already "sparked a rush of property sales", says Andrew Teacher at the British Property Foundation.

It's is a further sign that the recent UK house price rebound is unlikely to keep on going.

lostinrates

The thing that surprises me is the pre election bluster included and alluding to the creation of ''a nation of shareholders'' or investors or some such thing. Where CGT would also impact on this why would this encourage investment?

Blacklight

chucknorris wrote: »

I have in fact already lived in 3 of my 5 investment properties. But that's not how it works Hamish, if you sell a house that has been both your main residence AND has been rented out you then claim 'letting relief'. This allows you an additional 40k allowance and you can 'pro rata' the profit down for the years that you lived there plus the last 3 years in addition, so although it does have a significant effect, it does not make it tax free.

This is the case.

The last three years are free of CGT, leaving the period between living there and selling it minus 36 months as taxable.

If you bought a house for £200k, lived in it for a bit then rented it out for 5 years and sold it for £400k:

£200k gain pro-rata over five years = £40k / year gain
Last 3 years are free so it's 2x £40k to pay tax on
You have £40k allowance, so for a married couple there's no tax to pay

Above scenario is pretty unlikely given property prices haven't doubled in the last five years so I can't really see any CTG hike hitting the BTL dabblers.



Edit - played around with this a little bit more and came up with:

Gain - ((Gain per year x 3) +£80k) = Taxable Amount (at say 40%)

Taking a pretty extreme case of someone buying a place for £120k ten years ago that's now worth £240k, they only pay £1,600 if CGT increases to 40%

IveSeenTheLight

Thrugelmir wrote: »

Increase in capital gains tax rates may not be the only the change to affect BTL. I would hedge my bets that a restriction in offsetting interest payable against rental income will also come into force.

If (and it's a very big if) that were to happen, then there would be a huge likelyhoods of BTL leaving the market.

Who then provides the level of rental accomodation required?

It seems crazy to tax purely on income without considering expenses incurred in running that business. The only likelyhood in that scenario is more and more BTL businesses do not fit into the BTL model

StevieJ

Harry_Powell wrote: »

There are already discriminatory measures in place against BTL. For instance, you can't invest in residential proerty in a SIPP (though you can invest in commercial property) and you can't claim Entrepreneur's allowance on capital gains for property businesses.

New Govt though

StevieJ

MrEnglish wrote: »

the new coalition has just said that Capital Gains Tax (CGT) on second homes will be hiked from 18% to 40% after the next Budget. Buy-to-let loans have already fallen 15% in 2010's first quarter, says the CML. This post-election CGT news will hit buy-to-let players harder, and has already "sparked a rush of property sales", says Andrew Teacher at the British Property Foundation.

It's is a further sign that the recent UK house price rebound is unlikely to keep on going.

I am sure they have, better be quick because when the new rules are in force there will not be many BTL sellers, then again when is a second home not a second home?

StevieJ

Blacklight wrote: »

I like the way everyone's suddenly in agreement that property purchase = capital gain. Price of metals will take a tumble on the back of the sudden increase in supply of recycled tin foil hats.

One minute people are preaching that the mother of all crashes is *still* just around the corner, next they're jumping for joy that huge HPI will be taxed.

Make your minds up.

Good point that increase in CGT is not going to cut the deficit if house prices have tumbled

IveSeenTheLight

Thrugelmir wrote: »

In Eire only 75% of interest is now allowable against rental income.

A painless way to raise revenue and reduce the speculative investment in residential property which is a sure vote winner.

You like to compare against the Eire example, however they have different set of allowances and a different CGT margin.

If you are going to compare, isn't it viable to understand all the impacts and not only one part
http://www.revenue.ie/en/tax/cgt/cgt-faqs.html

http://www.revenue.ie/en/tax/it/rental-income.html

http://www.revenue.ie/en/tax/it/tax-chart.html

chucknorris

Blacklight wrote: »

This is the case.

The last three years are free of CGT, leaving the period between living there and selling it minus 36 months as taxable.

If you bought a house for £200k, lived in it for a bit then rented it out for 5 years and sold it for £400k:

£200k gain pro-rata over five years = £40k / year gain
Last 3 years are free so it's 2x £40k to pay tax on
You have £40k allowance, so for a married couple there's no tax to pay

Above scenario is pretty unlikely given property prices haven't doubled in the last five years so I can't really see any CTG hike hitting the BTL dabblers.

But the problem is when you have owned them for far longer ie 19 years in my case, there is still a significant tax bill as the profit is larger and the effect of the pro-rata is reduced if as in my case I have rented out for far longer than living there.

Although obviously I ackowledge as problems go it's a nice one to have.

dealsearcher

chucknorris wrote: »

Well the old taper relief used to give 50% relief for 'non busibess' assets when held for 10 years (I think it was 10 years, I forget). 50% relief would bring the 40% back down to 20%

Returning to that old (Conservative) way of applying CGT would be the fair way to go.