Budget: CGT rise to hit private landlords

Nia Williams

June 22, 2010

This will prevent landlords and second home owners from flooding the market with properties to avoid the higher rate.

Lower rate tax earners will continue to pay a flat rate of 18%. Entrepreneurs will see their capital gains tax payable at the lower rate of 10% on the first £5 million of income, a rise from £2 million where the threshold currently kicks in.

In his emergency budget speech this afternoon Chancellor George Osborne said: “One of the most chaotic areas of tax that the new government inherited from its predecessor is the capital gains tax regime.”

He added that Capital Gains Tax allowed and even encouraged exploitation of tax avoidance. “Some of the richest people in this country have been able to pay less tax than the people who clean for them,” he told a packed House of Commons.

He said it was therefore “right” that CGT should rise to create a fairer tax system, adding that the new rates are a balance of “fairness, simplicity and competitiveness”.

He told the House: “Low and middle income savers who pay income tax at the basic rate make up over half of all capital gains taxpayers. They will continue to pay tax on their capital gains at 18%. From midnight, taxpayers on higher rates will pay 28% on their capital gains.

“I have also decided that the Annual Exempt Amount for capital gains tax will remain at £10,100 this year and will continue to rise with inflation in future years.

“I am acutely aware of how important it is to protect the incentives to succeed in business and to innovate. So to promote enterprise, the 10% capital gains tax rate for entrepreneurs, which currently applies to the first £2m of qualifying gains made over a lifetime, will be extended to the first £5m of lifetime gains.

“I asked the Treasury to examine what would happen if we had increased the rate much further beyond 28%, and their dynamic analysis showed that this would have resulted in smaller total revenues.”

Osborne also said he considered in great detail the options presented for introducing tapers or indexation allowances, and concluded that the complexity and administration involved would have been “self-defeating”.

Mr Osborne said the changes made mean that:

– the capital gains of the majority of taxpayers are protected;

– the UK has a top rate that is in line with our international competitors;

– the UK system is kept simple and easy for any taxpayer to understand;

– and there is a reduction in the incentive to convert income to capital gains.

He added: “It is revealing that the great majority of the almost £1 billion of extra receipts we expect to see as a result of this change will come from additional income tax payments. I believe this is the right way to reform the taxation of capital gains.”

David Whittaker, managing director of broker Mortgages For Business, said: “While adjusting the threshold for CGT will raise more revenue this change affect more people than a straight hike in rates. But whichever option the government decided upon we knew the negative impact on the UK’s entrepreneurs and investors would be felt deeply.

“By increasing CGT the government is taking money out of the economy. In the property market the liquidity pool is still relatively parched. A healthy property market tends to mean a healthy economy. But by taking more cash out of the pockets of these investors the government is threatening to stunt the growth we expected to see in 2011.

“The rise in CGT combined with the income tax landlords already pay on rent means a double blow for these investors. They’ll be left asking what they did to deserve such punishment. Professional property investors will now have to work much more efficiently in order to maximise the amount of money they are able to take home from their portfolios.

“Maximising allowances and ensuring rental income is as tax neutral as possible will go a long way to help achieving this. Landlords will need to assess their portfolios thoroughly in order to realise where they can offset further and minimise the amount they have to shell out to the tax man.”

But Stuart Law, chief executive of Assetz, pointed out that Osborne’s Capital Gains Tax increase to 28% remains lower than the rates the market had three years ago, of up to 40%, before Labour introduced the 18% rate.

He added: “This move is not likely to have a negative impact on the UK property market as speculative investors are unlikely to sell off their buy-to-let property once this new tax rate is introduced at midnight tonight. Professional property investors are generally looking at the long-term benefits and see the importance of the regular income rather than short term capital gains.”

And Paul Hunt, managing director of Phoebus Software said: “Bringing Capital Gains Tax completely into line with income tax rates would have made property investors much more cautious about expanding their portfolios so it’s good it didn’t go up the whole way; although a lot of vested interests will still complain over the coming weeks. But with the deficit to tackle, property investors couldn’t hope for much more.”

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