CGT Reforms - Selling your business or buy-to-let property?

Although no-one can proclaim to be interested in tax it certainly commands your attention, especially when you face the likelihood of paying too much. The pre-budget report issued by Alistair Darling before Christmas suggest sweeping changes to Capital Gains Tax (CGT), under the guise of 'simplifying the tax system',  such that buy-to-let investors would be at least 6% better off if they sold. Business owners would however be worse off by at least 8%. These are not insignificant margins to say the least. Needless to say, a completely ridiculous timeframe of only four months was given for people to get their affairs in order. And the legislation wasn't even written yet!

To cut a long story short, after a little campaigning there was some back-tracking and revised guidance was given 24 January 2008. Legislation has still to be written and the detail still to be finalised but, still.

It seems that the back-lash may actually have worked in the favour of both the business-owner and the private investor. Well, to some extent.

Firstly, non-business assets (residential properties, investment shares) are subject to a minimum of 24% tax before 5th April 2008, depending upon length of ownership and other income. Assets sold afterwards face a flat 18% regardless of time or income. Good times!

Business assets (your clinic freehold or your business) currently face a reasonably atttractive effective rate of 10% if they have been held for two years. After 5th April this will revert to the flat-rate of 18% as previously suggested! However, a neon-lit 'Entrepreneur's Relief' has  been thought up between November and January. This suggests that a 4/9ths fraction will be applied to the first £1m of gains. For fans of Mr Benn, lo and behold 10% magically appears in place of the 18%.
That's tax simplification for you!

Anyway, on the face of it, all apears well. Although those anticipating selling £1m of business assets in their lifetime may face higher rates when the £1m 'allowance' is used up. And maybe I'm being too cynical, but relief at the rate of 4/9ths seems readily designed to be phased out over a number a years by a gradual reduction in the fractional relief given. Bad times.

 So what could this all mean?

Incorporation is always a hot topic and previously reported rate changes have all but rendered this worthless to most businesses. To those who predict future rate increase to the full 18% mentioned above, incorporating even before 5th April may see the opportunity to get the current favourable 10% rate 'in the bag'.

Also, if you have some buy-to let properties and are a little disillusioned with their current financial performance you have just been given an incentive to sell your portfolio as you no longer have to wait until you have owned the property for ten years to obtain maximum taxation reliefs. Instead of an effective tax rate of 24% after ten years you can now obtain a flat-rate of 18% after 6th April. Can you think of anyone who might be interested in this.? Without scaremongering, one can only surmise what might further happen to the UK property economy should a number of buy-to-let properties appear on the market around April/May 2008. Nice one guys.