Changes to Capital Gains Tax
Many people will be aware of the Inheritance Tax changes under the recent pre-budget report, but what might have gone somewhat unnoticed are the changes to the Capital Gain Tax (CGT) regime.
These changes should be of particular interest to clients with a property portfolio, because from 6 April 2008 such individuals can no longer benefit from Indexation Allowance or Taper Relief. However the level of CGT will be reduced from 40% to 18%. For clients considering the sale of any properties, it is important to determine whether a pre or post 5 April 2008 sale is more efficient for tax purposes.
Perhaps the best way to consider this point is through a worked example:
Mr Saver has two holiday home properties in addition to his Principal Private Residence.
The two additional properties are his holiday homes 1 Exeter Lane and 2 Somerset Road
a) Exeter Lane was purchased in 1991 for the sum of £95,000 and associated acquisition costs of £1,500. The property is now worth £200,000 and the estate agents fees for sale will be 2% of the sale price.
b) 2 Somerset Road was purchased in 1995 for the sum of £150,000 with associated costs of £1,500.00 and is now worth £230,000 and the estate agents fees for sale will be 2% of the sale price.
If Mr Saver sells this property before 6 April 2008 then CGT will be calculated as follows:
1 Exeter Lane (sale pre 6 April 2008):
Proceeds of Sale £200,000.00
LESS Acquisition Value -£ 95,000.00
LESS Acquisition Costs -£ 1,500.00
LESS Sale Costs -£ 4,000.00
Pre Relief Gain £ 99,500.00
LESS Taper Relief
Over 10 years ownership = 40% non-chargeable (£ 39,800.00)
LESS annual exemption (£ 9,200.00)
Net Chargeable Gain £ 50,500.00
Capital Gains Tax Payable (at 40%) £ 20,200.00
If Mr Saver sells this property from 6 April 2008 then his gain will be calculated as follows:
1 Exeter Lane(sale post April 2008):
Proceeds of Sale £200,000.00
LESS Acquisition Value -£ 95,000.00
LESS Acquisition Costs -£ 1,500.00
LESS Sale Costs -£ 4,000.00
Pre Relief Gain £ 99,500.00
LESS annual exemption (£ 9,200.00)
Net Chargeable Gain £ 90,300.00
Capital Gains Tax Payable (at 18%) £ 16,254.00
If you apply the same calculations to 2 Somerset Road, you will find that a pre 6 April 2008 sale would result in a CGT liability of £17,736.00 and a post 5 April 2008 sale would result in a CGT liability of £13,302.00. It is important to remember that each individual only has one CGT annual exemption (currently £9,200.00) so Mr Saver would have used this on 1 Exeter Road and is unable to use it again on 2 Somerset Road .
In conclusion, if Mr Saver were to sell the two properties after 6 April 2008, he would benefit from a total CGT saving of £8,380.00
It is important for all individuals to review their circumstances and the options available to them to ensure that any disposals are dealt with in the most tax efficient way.
The new CGT rules also have a significant impact on Business and Agricultural interests. These points are not, however, dealt this in this article
If you would like tax advice on any potential sale then please call our office to arrange an appointment with a member of our tax and estate planning department.
Author: Graham Fuller
Published: 15 November 2007