Wednesday, Oct 10, 2007
Another wheel has definitely come off the "long term" wagon!!
MoneyMarket: PBR: Fears CGT changes could prompt buy-to-let sell off
There have already been warnings that buy to let is propping up the housing market with CML figures showing that lending to buy-to-let investors rose by 37 per cent in the year to August. Standard Life head of pensions policy John Lawson says: "The changes to capital gains tax will encourage people to turnover their buy-to-let properties quicker. People will not take the long view with buy-to-let. Investors will take the speculative view."
Posted by confused76 @ 02:21 PM (1339 views) Add Comment
19 Comments
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1. little professor said...
The Telegraph reported that the CGT changes will actually fuel the BTL boom further, by encouraging more people to enter the market. Without the threat of 40% tax on any profits they make from future sales of the property, more investors are likely to pile in.
2. dugmug said...
Little Professor...just goes to show you can't trust imbecile journos in the Telegraph then! This article in moneymarket is correct and Telegraph is wrong, because...
Currently, taper relief on business assets means that you only have to pay tax on 25% of you capital gain if you have held the asset for 2 years or more. i.e. you sell your BTL for a £100k profit, but you've had it more than two years so you only pay 40% tax on 25% of that gain, i.e. £25k times 40% = £10k CGT.
For properties purchased before 1998, indexation relief may also apply. This means any gain in value pre-1998 can be adjusted down for inflation before CGT is applied, further reducing the tax bill.
From next April, the CGT rate drops from 40% to 18%, but taper and indexation relief goes too. So now you'd have to pay 18% of the whole £100k profit = £18k CGT.
This change reduces the incentive to hold BTL properties "for the long-term" as there will be no difference in the CGT rate due whether you hold the property for one year or for ten years. This also therefore reduces the long-term profitability BTL - those expecting lower CGT bills when they sold up in ten years time will now have to revise their tax figures up and so their profits down.
Only property "flippers" will benefit from this tax change, because they wouldn;t have been holding properties for two years in the first place.
In a market that is currently looking flat, and with an increase in your CGT bill due if you wait until after next April to sell, any BTL with properties they've owned for 2 years or more will surely be tempted to forget their "I'm in it for the long-term" strategy. Bye-bye-BTL.
3. pecker said...
Excellent post by dugmug! Thank god they didnt bring this in a few years ago! I agree, in the current market this is a MASSIVE incentive to sell!
4. dugmug said...
And whilst I'm at it...
"The Mortgage Practitioner Danny Lovey says it is too early to tell what effect it is going to have on the market as the proposals have not been cast in stone yet. He says: “He hasn’t put the full detail in it yet so there is a lot of time before now and April where the Government will be lobbied by a lot of different groups to try and make it more long-term friendly. To encourage short term investment will not help anything but I think it’s too early to tell. We won’t know what the ramifications will be until the detail has been put in.”
The article starts by telling us that Darling himself has pointed out this possibility of a BTL sell-off, so expecting the government to go "oh, we didn't realise, we'll change it back!" seems wishful thinking at best. I haven't seen the "simplified" flat-rate of 20% income tax being changed back again, just because it's been shown to disadvantage the lower paid, after all! Giving back some form of taper would un-"simplify" the system again and could mean this tax change actually generates less income for the government than the current system - you're havin' a laugh if you think they're gonna do that; this is another disguised tax-hike using the phrase "simplifying the system" as a smokescreen again, have no fear.
And anyway, it takes at least 3 months to sell a house - if you're a BTL thinking of trying to sell up before the 8th of April, how long will you leave it to put your property on the market "just in case" the government has a change of heart?
5. paul said...
Good work dugmug! Have a gold star.
6. Night said...
Check this out:
http://www.is4profit.com/is4money/tax/taper-relief.html
Picking up from dugmug's example, if the BTL guy has had the property for 1 year, he pays 40% tax on 50% of the profit, so on £100,000 that would be £20K (or 20%). In other words, anyone who bought in the last 18 months (ish) and wants to get rid of their property (for whatever reason) is better off waiting until the flat rate of 18% is set in April before they try to get out.
Guess that depends on whether you think that your property is going to lose 2% of its value before April tho...
7. Baffled Ftb said...
Hang on - BTL do not count as a business asset, they are an investment asset
8. Winnie said...
Best post of the month! PHEW!
9. little professor said...
Thanks for that making that clear dugmug. What the telegraph article said was "This CGT tax cut is expected to further fuel the buy to let boom" - I can't find it on the online edition, but I did find this link which says that if you are a second home owner, then "you are a winner" under this new system.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/10/cmcgt10.xml
10. deepak said...
Dugmug,
Can you explain the following on a £100K captial profit. After 2 years you said they tax is 25%. Should the Tax not be 25K rather than 10K.
What I would expect saying some one bought a house for 200K and sold it for 300K. 100K profit and held it for say 3-4 year.
and for that period he gets say 30% taper relief ( for argument purposes). So the profit is as following
Cost before taper relief 200K
Cost after taper relief 200K + 30% ( 200K) = 200 + 60 = 260
Selling price - Cost = Profit
300K - 260K = 40K
So Tax = 40K * 25% = 10K
11. cyril said...
@baffled Ftb - you are not the only one who is confused about CGT. I am sure many BTLs don't understand what their tax position is.
12. Soldout said...
I'm no expert, but I think taper never applied to small scale BTLers, so a straight cut from 40% to 28%. April rush to exit? Too late dudes!
13. confused76 said...
they should give a large CGT exemption (say 500k) on the sale of the first home, if proceeds are reinvested in the first home
that s how it works in the states
14. deepak said...
I think I have got it and its worse that what Dugmug presents.
If you see the link presented by "Night" about capital gains http://www.is4profit.com/is4money/tax/taper-relief.html You can see that companies get 75% taper relief.
Which means a speculator could have bought a house of 200K so within two years he could deduct 150K (75%) as expences.(Basically the director could pay themselves big fat pay cheque. So if he sold the house for 60K he would still make a profit of 10K.
Now this distinction between business assets and non business assets is now gone.
This means all the business speculators will suffer badly.
15. The Baldman said...
Remember if your business is buying and selling houses it is probably a trade and subject to income tax at the normal rates not CGT.
16. Mutu7886 said...
Hello, first time poster.
The rate at which you are taxed on an asset sold pre 4/08 will depend on whether or not it is held as a business asset or non-business asset.
A business asset held for >2 years will receive taper relief of 75% thus a higher rate taxpayer will effectively pay tax of 10% on the gain (25%x40%).
I suspect that most BTL is held in a non-business asset 'vehicle' therefore even with maximum taper relief (35% on NBA I believe) the minimum effective rate of tax on the gain even if held for many years is 26%.
It would therefore be advantageous for most people to hold on to their property and sell post 4/08 to reduce the rate to 18%.
In concusion if you read between the lines this is a cynical attempt by the government to put the brakes on an ailing housing market only to reinvigorate it with interest rate cuts in Q1 2008 together with this CGT carrot.
17. Baffled Ftb said...
Actually BTL only count for standard relief - to qualify as a business asset a property must be available as a holiday let for at least 140 days a year, let for at least 70 days and not to the same person for more than 31 days consecutively.
This means the max relief available is 60% for properties held for 10 years or more. Thus minimum effective rate 60% x 40% (assume top band tax payer) = 24%
This means BTL are better off to wait post April 08 to get the 18%, which I'm sure was the intention.
Last trick in the box I guess.
18. tony marshall said...
Guys - BTL investors don’t get the 75% taper, as BTL is not a ‘business asset’. Dugmug has got this wrong.
Furnished holiday lets are business assets, but ordinary residential property only gets the standard taper relief, ie 5% after 2 years, increasing by 5%pa up to 10 yrs, when a maximum taper of 40% is earned. So a gain of £100k gets treated as £60k after 10 years, so if they pay tax at 40% then they pay £24k in tax. Under the new rule this drops to 18% or £18k. Of course, some of the gain may currently be taxed at 20% (giving an effective rate of maybe 12%, being 60% of 20%), if they have other income below £40k, but this would only be a small part and is unlikely to swing it far the other way, unless they don’t have much other income and have only made a very small gain.
So don't get too excited about a sudden sell-off...
19. Greg said...
i think the whole problem started when the white man started to own land and put up fences to keep out his neighbours.since then greed has become the new god.i'm sorry i've never studied economics so i am not worthy to blog on this site.however, i've owned my own properties,but have decided to sell them to prospectors and BTL investors.i now live in a bedsit.i'm happy,free and when the sh*t hits the fan i'm going to get a good few cases of beer in and have a party......ha,ha.there is more to life than trying to rip off your neighbour.................."this land is your land".....Woody Guthrie.........thanks,greg.