Does Darling Deliver? Tax Implications 2007 As every successful property investor knows, saving tax can make all the difference in the plight for financial freedom. I suspect many readers did not decide to watch Darling's pre-budget report on television, although may I encourage you to read on as there may be some good news for some of you as we consider the two proposed changes to the UK tax system.
The Capital Gains Tax (CGT) reforms have already been publicised as the biggest bombshell delivered. For those that don't know, a decade ago Labour sought to introduce a CGT regime to benefit owners of businesses:
- The regime resulted in an effective higher tax rate on gains made on the sale of business assets of 10% after two complete years of ownership. The definition of business assets can include properties commercially let and furnished holiday accommodation.
- For individuals owning investment assets (such as rental properties) the effective higher tax rate was reduced to 24% after 10 complete years of ownership.
It was announced that from 6 April 2008 there will be a new single CGT rate of 18%. This change has significant implications for property investors.
Firstly, take the investor with commercial property (or holiday lets) in their portfolio. Your tax rate when you sell or gift commercial property will effectively increase by 8% from the start of the next tax year. If you have inherent gains in a commercial property, say £200,000, a sale of a property after 6 April 2008 will cost you £16,000 more in tax!
Can you avoid this tax? Yes! You could:
- Sell the property before the new rules come into effect.
- Rebase the property value by triggering a CGT liability at the lower rates this tax year, thereby saving 8% on the inherent growth in the property.
Secondly, consider the investor who has built their portfolio in a company, which is going to grow substantially in value. Going forward the flat CGT rate of 18% may be far more preferable than the corporate tax rate on gains made within a company and subsequent taxes on extracting profits. It might be worthwhile liquidating the company and taking a capital distribution - it would be taxable at the flat CGT rate but so would future growth.
Thirdly, let's look at the bright future for property investors wishing to generate an income stream. A property investor could as part of their overall strategy look to sell properties to provide them with an income stream. So long as the activity does not constitute a trade for income tax, the regular disposal of properties could provide an effective income stream at a tax rate of 18%!
Many of you will also be aware of the enormous current tax advantages for non-UK domiciled persons. Probably in response to media pressure, Darling announced measures to be consulted on. This means that despite the proposals made, it is unknown what final format they will take. One measure proposed is that a non-domicile who has been resident in the UK for seven years or more will be liable to a tax charge of £30,000 if they wish to benefit from the remittance basis (only taxed when they bring foreign income/gains into the UK).
For a non-UK domiciled person investing in non-UK property, they could now become liable to UK tax on the income and gains on those properties. The actual income tax position might not be significant depending on gearing and overseas taxes paid. The CGT position is likely to be less welcome.
No mention was made as to how the rules could affect offshore trusts: A non-UK domiciled person can protect income, gains, and asset value from income tax, capital gains tax, and inheritance tax by sing offshore trusts. Such trusts can own a UK property portfolio and realise gains tax free.
Since there is specific legislation applying to offshore trusts, it is suspected that the changes to the taxation of non-UK domiciles will not affect the treatment of offshore trusts. Therefore, non-UK domiciles may still be able to structure their affairs efficiently through the use of trusts (as many do anyway).
Anton Lane is a director of Specialist Tax Solutions Ltd, a company specialising in structural tax planning, in particular for property investors and developers. Anton can be contacted at adlane@specialisttaxsolutions.com or on 0845 141 1411. |
