New CGT rate could help generate extra interest in buy to let
A new single rate of 18 percent Capital Gains Tax for buy to let investors and second home owners will be introduced on 6 April 6 2008, benefiting individuals, trustees and personal representatives.
The current rate is 40 percent for higher rate tax payers who have owned their property for less than three years. Even after a 10-year ownership of a property, the most a higher rate tax payer could hope for is a fall to a minimum of 24 percent.
The new rate has been welcomed by property investors and will make owning property personally advantageous for many discerning owners.
Alongside the change in rates, there is also a change in the indexation rule. Indexation was an inflation adjustment to the original purchase price and enhancement costs incurred up until 5th April 2008 which may result in the cost increasing thereby reducing the taxable gain.
A change in indexation relief will also have an impact on those who have owned a property for a long time. It is still necessary to take into account the effect of double tax relief.
A higher rate tax payer who bought five years ago for an average price of £123,000 and sells now for £200,000 could face a potential Capital Gains Tax bill of £22,500. If they sell after April 5 this year, their tax bill would potentially fall to £12,204, which is a saving of £10,296, assuming they sold the property for the same amount.
This reduced tax liability could have a positive effect on the property market as those with extra capital to invest would be more inclined to do so with the introduction of this new rate.
The new rules on capital gains tax and the indexation rule are very different to those made previously; therefore buy to let investors are encouraged to consult a professional adviser or accountant before taking any steps.
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