Capital Gains Tax

The new Government are proposing changing the way capital gains are taxed. This will include profits from the sale of BTL properties, but not from your main home, which will remain tax free.

Currently profits are charged at 18%, after allowing for an allowance of £10,100 per person. So a couple will be able to make £20,200 profit without paying tax.

They intend to charge CGT at the same rate as you pay on income tax. So it would be at least 20%, perhaps 40% if you earn over £42,000 a year or so – 50% if you are lucky enough to earn over £150,000  a year. If you fall between these figures, some of your profit will be taxed at the lower rate, some at the higher rate.

So if you earn over £42,000 a year, you will pay 40% tax as opposed to 18% tax, if you sell the property.

The fear is that this could force house prices down in one of 2 ways – forcing those who own a BTL and are sat on a large profit to sell now to keep their tax bill low.

For instance, say you earn £45,000 a year and bought a house, some years ago, and it is now worth £110,000 more than you paid for it. Subtract the £10,000 CGT allowance and you pay tax on the £100,000 profit at 18% = £18,000 cheque to the Government.

If you wait until next year to sell, the tax will jump to 40% = a total of £40,000 would be payable in tax, an extra £22,000 in tax.

So, you can sell now and save £22,000 in tax. The concern is that many people will do so, flooding the market and forcing prices lower.

Secondly, potential BTL buyers will be put off from investing – why invest if I only get to keep 60% of the profits? The lack of demand will also push prices lower.

The net effect is that BTL has suddenly become less attractive an investment. I’m not sure this will be the case – anyone with money to invest will still have the same level of CGT to pay regardless of where the money in invested – but at the very least it will upset an an awful lot of people with BTL’s that they were planning on selling soon…..

This entry was posted on Saturday, May 29th, 2010 at 11:21 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.