Assetz® News - Massive tax cut for Buy-to-Let Investors

Massive tax cut for Buy-to-Let Investors

16th October 2007 |

Now here's a surprise - as I commented on in my blog two days ago I've had it confirmed that there's been a reduction of over 50% in the capital gains tax rate for buy to let investors proposed in the prebudget report by Alistair Darling, the Chancellor.

Capital gains tax as of April next year will have a flat rate of 18% rather than the potential 40% capital gains tax an investor currently pays on buy to let property capital appreciation. If an investor held a buy to let property for many years, the capital gains tax rate had taper relief apply that reduced the 40% tax due on gains gradually down to 24% after 10 years. Well now it appears a flat 18% rate will apply after just one day of ownership.

Unfortunately, holiday let property in the UK only had a capital gains tax of 10% after owning it for two years due to it being a business asset and having a very good taper relief apply that quartered the tax after two years - this tax rate has now gone up to a flat 18% under the proposals for April. The good news is that this applies on day one and there is still the opportunity to pay no tax at all by rolling over the profits on the sale into another business asset which can include another holiday property to be let out.

One final unexpected massive benefit to buy to let investors is the reduction in the tax trap many people have got into by refinancing their properties too aggressively over the last few years. An investor owes tax on the sales price of a buy to let less the original purchase price. If the investor had refinanced well above the purchase price it was quite possible that the tax due on the sale was more than the equity remaining in the property. With 40% tax this was an easy situation to get into but with 18% tax many investors could find it easier to sell property that they had refinanced aggressively over the last few years without paying more tax than the equity remaining in the property.

Before everybody rushes out and votes Labour (if you weren't already going to before Gordon 'bottled-out') in response to this wonderful gesture is worth noting this particular change was an accident by Darling who was trying to target private equity tax leakage and as usual a rushed policy change had unintended consequences - but I guess we're not complaining about this particular benefit.

There is one last point - I suspect that this reduction in capital gains tax will cause the Revenue to start trying to classify more and more legitimate property investment activity as trading - investment carries the capital gains tax rate whilst trading carries the income tax rate, still 40% for most property investors. Watch out and ensure if you are investing in property not just trading and then decide to sell that you have a paper trail documenting this as your original intentions. For more detail see your accountant and tax adviser.

Stuart Law

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