Capital gains tax and the property sector
Property investors and developers have enjoyed a significant return on their investments and generally property markets, not always drawn by speculation, have followed their own course. Property bubbles have occurred when the tax rate was an effective 40% and inflation was very much under control.
Emergency Budget 2010 update
The changes proposed are not as radical as some had predicted with a continuation of the 18% capital gains rate for basic rate tax payers but with a new rate of 28% for higher rate tax payers. The annual capital gains tax exemption remains the same at £10,100 and relief for gains on business assets, the Entrepreneurs relief, has been increased from £2 million to £5 million.
Read our full analysis of the emergency Budget.
Opportunities
So where does this leave tax planning within the property sector. The immediate advice is ‘think before you leap’.
There is no doubt that there will continue to be complexities within the legislation and traps that could catch the unwary in their interpretation of the legislation.
There are always opportunities to crystallise gains but in order to fix the rate of tax it is necessary to make a disposal. With a potential increased tax rate of 28% a disposal now may seem advantageous but any opportunities must be approached with care because they may have other consequences.
There has at times been a very thin line as to whether the ultimate profit on a property transaction is income or capital, business or non-business. There is, however, detailed anti-avoidance legislation designed to catch any artificial move between income and capital
It is obvious that the advantage that has existed between income and capital tax rates will be eroded by the proposed changes but not to the extent that was first thought and there will be an extension to entrepreneurial reliefs.
It should not be forgotten that corporate capital gains are taxed at company rates and the proposals for corporate tax rates are that the lower rate will reduce to 20% from April 2011 and the higher rate to 27% from the same date. There is also the proposal to further reduce the higher corporate tax rate to 24% by 2014.
History dictates that tax rates have not affected the property market; it is most unlikely that the market is robust enough to justify profit taking on a large scale, so investors looking for long term gains should think long and hard before even considering tax motivated sales.
So, our conclusion at this point is to review and re-evaluate your current property strategy; look carefully at the potential yield and tax effectiveness, both now and with the proposed tax changes and consider the options, risk and cost in changing the ownership structure.