Sunday, October 28, 2007

WE HATE CAPITAL GAINS TAX

Capital Gains Tax changes - good for property investors, bad for business owners
(Mark Harrison)


Well, the dust has (almost) settled, and it’s time for a quick review of what Chancellor Darling’s pre-budget report actually means for us.

I should stress at the outset that if you hold business or property assets, and are thinking about selling them, then you should go out and get professional advice from a tax advisor about whether to try to do so before or after the 6th April next year. This is very much my personal understanding of the “headline issues” only… in no way am I trying to give tax advice.

The overall summary is that it’s a welcome piece of news for us property investors, but bad for us business owners (so once again, I’m in a “he giveth with one hand, he taketh with the other) situation.

OK, time to review the current arrangements for Capital Gains Tax (CGT):

1: Everyone gets a tax-free allowance each year for “capital gains” (businesses, property, shares, etc.). In the analysis that follows, I’m pretty much going to ignore this, because it makes the explanation easier, and doesn’t really change the “impact”

2: Some things (like the house you live in) is exempt from CGT.

3: The “basic rate” for capital gains has been 40%, but with a wrinkle, as follows:

3.1: For “business assets”, like shares in a private (unquoted) company, shares in companies quoted on AIM, shares where you own 5% or more of a given company, or where you’re a Director or Employee of the company, you get “business taper relief”, which has been good. Basically, provided you hold onto the asset for one year, you effectively pay tax at 20% instead of 40% (so-called 50% taper relief)… and if you hold onto the asset for two years or more, you effectively pay tax at 10% (so-called 75% taper relief.) For those of us who’ve built businesses, and then sold them, this has been, well good… since it means that we’ve paid 10% tax on our gains.

3.2: For “non-business assets”, like rental property, you get “non-business taper relief”. This cuts in MUCH more slowly, with not a penny reduction until you’d held the asset for 2 years (at which point you get a reduction from 40% tax down to 38% - woo)… and “full relief” only after you’ve held it for 10 years (at which point you get a reduction from 40% tax down to 24%.)
Some quick illustrations when explain why we property investors have been campaigning to be treated like business owners (given we’re regulated like them!)
Hold a business for 2 years, pay tax at 10% when you sell it. Hold a rental property for 2 years, pay tax at 38% when you sell it. Hold a business for 10 years, pay tax at 10% when you sell it. Hold a rental property for 10 years, pay tax 24% when you sell it. Here’s the proposed new rule…

Capital gains tax will be at 18%, irrespective of how long you’ve owned the thing, and irrespective of whether the thing is a “business” or a “non-business” asset. You can probably see, therefore, why someone who’s got a few buy to lets, and was thinking of cashing out, is probably going to hang on until next April to sell, all of a sudden… and pay tax at 18% rather than between 24-40%.

Likewise, however, pity the poor businessman who has worked the last 7 years, ploughing his life savings into the thing, working all hours, and looking forward to selling out when he hits 60 in 2010… suddenly, he’ll pay 18% tax rather than 10%… almost double what he would have paid.

Expect to see a few small businesses up for sale over the next few months, as people try to sell up under the current rules rather than the proposed new ones…

… but if that’s you looking to sell, go and see a real accountant first, eh?
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