Capital Gains Tax Changes and How it Impacts on UK Landlords

The owners are expected to be one of the main beneficiaries of tax changes proposed by the rectors reported pre-budget statement last week. This statement outlining changes to be made for fiscal year 08-09 and effectively the tax regime which will come into force on April 6 08. What is the cost of a transfer and owners are selling better now under the current scheme of taxation of capital gains or should they wait? In this article I set out to investigate what this means for the owners

The current tax regime

The current system of the Capital Gains Tax (CGT) has actually been set up by Gordon Brown in April 1998, when it introduced a system of relief cone to replace the old system of indexing. The idea behind taper relief is that it encourages companies and investors to hold ownership of their assets in the long term and discourage investment in the short term speculation. This resulted in a tax system where the amount of tax paid reduces the more the owner held their buy-to-let investment property for a maximum of relief given after 10 years of detention of their residential property investments.

When Capital Gains Tax (CGT) apply?

Taxes on capital gains is a tax that the owners pay only on the sale of their buy-to-let investment property. He is considered one of the best slice of taxable income and therefore the rate of an owner who will pay will depend on what the owner of income earned during the year of transfer. A landlord in the calculation of the potential for capital gains Tax (CGT) tax liability, an owner must apply the following concepts of their capital gains Tax (CGT) calculation.

1. An owner should establish the basis of their buy-to-let investment cost (acquisition cost effectively)
2. A landlord must establish the size of the database to gain by taking the cost of the transfer of value
3. An owner must establish whether buy-to-let as an investment holding non-commercial or as an economic asset (most are non-commercial, while locations are classified as assets of a company)
4. For property purchased before April 6, 1998, the gain is subject to indexation
5. Properties purchased on or after April 6, 1998, the gain is subject to taper relief

Effective rate of tax on capital gains (CGT)

For most owners the effective rate of tax on capital gains (CGT), which will pay a homeowner depends on their rate of income tax. For an owner who is a basic rate taxpayer effectively Capital Gains Tax (CGT) could reduce the rate to 12% the percentage of the gains from reduced to 60% after 10 years and then charged at 20%. For homeowners who are higher rate taxpayers the effective rate is double because they pay 40% tax.

The new regime

The new Chancellor Alistair Darling plans to sweep the old system of indexation and relief cone carefully set up by former Chancellor and replace the indexing systems Relief and conical with a single flat rate of 18%.

The verdict for the owners UK

On balance news for owners is good. The new flat rate Capital Gains Tax (CGT) apply to a landlord immediately and means that for a high rate taxpayer will be paying 6% less than what they would have done after 10 years under the old system Relief conical. For basic rate taxpayers things are less clear cut. Under the old system, a basic rate taxpayer ought to have held their buy-to-let investment property for 4 years before they qualify for a rate as low as 18%. However, it would eventually be reduced to 12% after 10 years, about 6% below the rate that will come in on April 6, 2008.

A couple of beneficial owners are the points that the new system is much simpler to understand and ownership should be the elimination of investment decisions and calculations much easier for the owners.

It also paid much more attractive to the owners of their trade potential buy-to-let investment buying and renovating a property, possession for a few years before then sell their buy-to-let investment .

However, it is perhaps not so much a gift tax to the owners because it appears for the first time. For starters, the anticipated slowdown in the housing market in the United Kingdom may mean that the possibilities for purchase of a property and then rent up to have may not be as widespread as they have been over the last 10 years the growth of housing. Also owners should be aware that if they do regular tax administration may consider that the owner is actually engaging in a trade and any profit that the tax revenue anyway.

The reality is for most homeowners buying investment property is considered a long-term investment. ARAL the Association of Residential Letting Agents latest quarterly survey (September 07) owners showed that 66% of owners surveyed intended to keep their properties housing investment over the past 10 years. These owners would have received the maximum available relief cone anyway.

Proposed tax changes seem to be a classic case of smoke and mirrors where taxes for some owners ie high rate taxpayers appears to have decreased, while those of lower tax rate monte potentially risers.

Owners must sell?

This potential change in the tax law has led to an interesting dilemma for some homeowners more than make their buy-to-let investments.

Previously, the tax system strongly encouraged to keep their properties for the long term in order to maximize their taper relief. Now, for a lower rate taxpayer who owns their property for 10 years or more of a quick elimination before the new regime could potentially save them a lot of money.

Similarly to the high rate taxpayers who have raised the possibility of a sale, possession until the new tax regime is in place could also save a significant amount of money.

Therefore, it must be weighed against their landlord wider and long-term financial plans and aspirations. If the housing market does weaken considerably by next year the sale at a time of low demand for housing may not be the best time to exit the market when a tax savings could be made . Property Hawk: a site aimed directly at UK Landlords. The site incorporates free property management software that enables a landlord to track all their financial data relating to their portfolio. It allows landlords to print tenancy agreements and other forms FREE FOREVER. The site generates a real time rent book for each property as well as calculating a landlords tax liabilty. Free at propertyhawk.co.uk