Tuesday, October 23, 2007

CGT is a fiasco, of inept bad planning, etc

Darling faces pressure on CGT changes

Slightly off-beat but BTL are not the only ones affected."The tax system for small businesses in the UK is becoming significantly less competitive. The changes to capital gains tax announced in the 2007 pre-budget report will further undermine the attractiveness of the UK as a place to create and grow a business," the ESM said in today's report.By pre-announcing the CGT Darling & GBH have engineerred a property price crash when BTL's sell-up all together in April. >>> But its small business that will really suffer and since most people are either the proprietors or the employees of SME's, we are really looking at the edge of a recession here. <<<

Posted by fahrenheit451 @ 10:20 AM (822 views)
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9 thoughts on “CGT is a fiasco, of inept bad planning, etc

  • Darling/Brown can and probably are adopting this strategy. The pre-budget report stems sales and by implication slows the crash until April, as for a lot of people it will make sense financially to wait until April. However, as April approaches they are in a perfect position to abandon the CGT changes. This allows them to cross their fingers and hope the markets get better within essentially a half year period. As most of the loans reset every two years, and the uncertainty in the loans is causing the problems, they have allowed at a reasonable guess 25% of them to be revalued, which is a fair amount.
    So if they continue with the non-existent carrot promise they are proceeding with a strategy (whether a good one or not). Also, the introduction of HIPS can be reasonably seen as a slowdown to market liquidity, further slowing the crash.
    All of this media attention about “Darling faces pressure” is great because they can abandon the proposal (its a pre-budget not the real one) without looking like scoundrels. The losers will be those who should be selling now who are waiting for April. Maybe the tactic will work and even those waiting won’t lose out (as in won’t lose more than they were originally going to lose).
    The government, it appears, does have the ability to freeze a market through tax “promises”. The CGT changes won’t actually materialise, in my view.

    So although I would agree that they have engineered a bigger crash in April, only if they are as good as their word, and I don’t think they are.

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  • ”The pre-budget report stems sales and by implication slows the crash until April, as for a lot of people it will make sense financially to wait until April.”

    This is not entirely true as it depends upon when the property was bought and also on individual tax circumstances. For many BTL who have max taper relief it would make sense to sell before April. A friend of mine has just done the calculations and will be substantially worse off after the new CGT rules come into force. He already has the property on the narket but has dropped the price to speed things up.

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  • David Smith's Sub Prime. . . says:

    Not a U Turn? Oh nooooooooowwwwww………

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  • Pdoff – I’d be interested to see the calcs – max taper is 60%, ie 24% tax rate (and if he qualifies for that level of taper, ie since April 1998, he must have a gain that takes him into higher rate bracket). Alternatively, he’d have had to have bought years earlier to get enough indexation – not unless he bought at the top of the last boom – that would probably about do it. He’s not thinking he’ll get business taper of 75% is he? Only furnished holiday lets get this.

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  • Sorry – slip of the keyboard – max taper 40%, leaving effective rate 60% of tax rate, ie 60% x 40% tax rate gives effective rate 24%.

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  • Remember that the government really don’t care about their popularity until an election is looming – I reckon they’re trying to engineer the slowdown/crash to get it out of the way and get prices rising before the next election.

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  • bidin’ – I read an analysis somewhere when the new CGT was announced that someone who had lived in the house and then rented it for (say 4.5 years) would only pay 10% (ish). This is just second hand information though.

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  • Bidin’
    I don’t know the exact details but my friend bought the flat in 1996. He only works part time and reckons that tax would be mostly at 22%. He says he will be worse off due to loss of taper relief.

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  • d’oh – that would be due to PPR (Principle Private Residence) relief – I’m 99% sure that this is unaffected by the new rules, so would still apply after April (the pre-Budget report makes no mention of it). Without going into the details, if the property qualified for half the time he owned it, this would halve the gain, so reducing the effective tax rate accordingly (I know, more due to the effect of the annual exemption, before anyone picks me up on that one, but we’re talking general terms here..) – so the 18% would be reduced in the same way as the current, maximum tapered, 24%.

    P.doff – even if he has no income, he will pay 24% on the gain over about £50k and if he bought in 1996, his gain will likely be well over this. 22% sounds a fair estimate of the average rate of tax, but this is still more than 18%…

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