The Conservative-Liberal coalition agreement states that the alliance will “seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities”.
Moore Blatch, a wealth management law firm, says that even if capital gains tax rises to 40%, it could still be worth delaying the sale of property until after the changes come into effect.
The government has not yet confirmed when the rise will take place, though industry consensus suggests that the new rules will raise the rate of CGT from a flat 18% to a banded tax with a headline rate of 40% or 50%.
Jeremy Cape, tax partner at law firm Denton Wilde Sapte, believes it is likely the changes will be announced on June 22nd, the planned day for the emergency Budget, and that he “wouldn’t be surprised if changes were brought in with immediate effect”.
Moore Blatch said Land Registry statistics show a 7.5% 12-month rise in property prices and, assuming this trend continues, investors could be financially worse off if they sold now compared to in a year’s time, despite the fact that the tax rate is more than doubling.
The firm gives the following example: an investor selling a £200,000 property now with a capital gain of £50,000 (assuming an acquisition value of £150,000) would be liable for £7,182 CGT at 18%, taking into account the personal allowance. The net worth of the property would therefore be £192,818.
But if property prices increased a further 7.5% over the next 12 months, the property would be worth £215,000 and the gain would be £65,000, liable for £21,960 of CGT at 40% after deduction of personal allowance. The net worth of the property would therefore be £193,040 – more than 12 months previous.
David Charlesworth, head of wealth management at Moore Blatch, said: “Anybody running property within a business should seek tax advice as there are likely to be tax changes that need consideration such as business property relief, agricultural property relief, using IHT and trusts for estate planning.”
Moore Blatch says landlords who hold a property portfolio as part of their retirement planning should consider putting assets into a trust structure, which the firm says could remove all CGT issues.
Alex Henderson, a partner at professional services firm PricewaterhouseCoopers, said it is too complex to apply a one size fits all approach to tax planning.
He said: “Trusts will certainly be a good idea for some landlords, but not all.
“Selling the asset to a trust triggers CGT because the trust is treated as a separate person. That would allow the seller to pay CGT at 18% but the family to retain an interest in the upside.
“That will clearly not be appropriate for everyone though because if you sold tomorrow, the 18% tax would still be payable this year, so it relies on an independent source of funding to pay the tax bill.
“There are also other issues related to trusts – inheritance tax being one.”
Cape said it was important not to read too much into the language of the coalition agreement, which he referred to as “colloquial”.
He added: “The important thing to remember is that nothing is certain on these changes.
“We don’t know what the relief for entrepreneurs will look like and we don’t know how long these changes will be in place for.”
Under taper relief, the previous system of CGT, Cape said buy-to-let was not treated as a business asset, but he maintained that there had not been enough clarity from the government to say whether properties bought to be rented out would fall into this asset class under the new system.
Henderson also suggested that there have been CGT changes on a fairly regular basis over the past 13 years. He warned landlords to consider carefully before selling up.
He said: “Ultimately it comes down to a personal assessment of what you think may happen in the future. That’s a difficult decision admittedly.”
Cape added that there were lots of tax planning opportunities, but none was without risk.
“Prices go down as well as up,” he warned, “and any tax payable on a sale now if the asset is transferred to a trust, will be payable at that level, even if the asset depreciates in value.”
Charlesworth said: “We would advise against making hasty decisions especially with regards to any CGT rises as the capital appreciation is likely to outweigh any increased tax liability.”
