Now that the dust has settled following the Emergency budget we have digested further the small print, unearthing key elements that the sector needs to review.
There was a collective sigh of relief when the Chancellor announced the new rates of capital gains tax (“CGT”) on budget day. Basic rate taxpayers will pay CGT at 18% and higher rate taxpayers at 28%. Furthermore the annual CGT exemption remains at its formerly announced level of £10,000.
The Chancellor explained that he had been advised that if he put the CGT rate up to a higher level CGT receipts would fall and how right he was. The surprise was that the increased rate was operative from midnight on the 22 June 2010.
It was disappointing that the Chancellor took a positive decision not to give taper relief or indexation allowance in respect of assets held long term in favour of simplicity. Companies continue to benefit from indexation allowance.
Although the Chancellor announced that basic rate taxpayers would pay CGT at 18% the press releases made it very clear that it would be only the part of the gain that falls within an individuals’ basic rate band that will be taxed at 18% any excess will be taxed at 28%.
The basic rate band is £37,400 for 2010/11 and so gains up to £47,500 will be taxable at 18% provided that an individuals’ other income is no more than the personal allowance of £7,475. The annual CGT exemption and capital losses can be used in the way that is most beneficial (which will be against post 22 June gains) and gains arising on or before 23 June continue to be taxed at 18% unless they attract entrepreneurs’ relief.
The lifetime limit for entrepreneurs’ relief has been increased from £2 million to £5 million.
The Chancellor also announced reductions in both the main and small companies’ rate of corporation tax.
On the issue Stamp Duty Land Tax the Chancellor announced that Government will examine whether further changes to the rules on Stamp Duty Land Tax on high value property transactions are needed to prevent avoidance in this area. He has so far shown no inclination to extend the 5% stamp duty land tax rate that will apply from the 6 April 2011 to residential properties with a value of more than £1 million to other high value properties.
What does all of the above mean for the property and construction sector?
- Joint ownership of investment properties will be beneficial if one spouse is not using their CGT exemption and/or their income tax basic rate band
- Consideration should be given to whether personal or corporate ownership of investment properties is likely to be better going forward given the increased CGT rates no allowance for inflation for individuals (unlike companies) and the reduced rates of corporation tax.
- The higher tax payable may make it more difficult to sell a property and purchase another one that will improve the overall return on a portfolio given the amount which will be lost in tax.
- It will be even more important to ensure that entrepreneur’s relief is not lost in relation to shares in property development companies because of the existence of investment properties. The saving on a £5 million + gain is 18% of £5 million i.e. £900,000. A tax free demerger may be the solution.
- For property developers there must be a risk that the new CGT rate even at 28% will be a disincentive to bring development land to market or the price will go up to cover the increased tax bill. In this connection it should be noted that entrepreneur’s relief is only available in relation to farming if farm land is sold together with all or part of the business. Simply selling fields to a house builder is not likely to qualify for the 10% tax rate.
There will be more detailed articles on each of the above topics in the next issue of Building Confidence.
In the meantime there must still be the risk that the 28% rate, with no relief for purely inflationary gains on assets held long term, will cause some stagnation in property and construction generally.
For further information please contact your usual adviser.