11.06.10

By Stephen Herring

For a tax that is forecast only to have collected £2.5bn in 2009/10 – compared with £145bn from income tax – there continues to be heated debate about potential capital gains tax (CGT) changes.

Contrary to what Revenue and Customs appears to think, few property investors seek to “artificially” convert income into gains. In our opinion, the maximum CGT tax take is unlikely to exceed £6bn, whatever changes are introduced.

Our clients have stated clearly that they would defer property disposals that would trigger CGT if the rate were to be made too onerous. Hopefully, one can safely assume that the Treasury would not wish to prompt a rush of buy-to-let and commercial property disposals for a one-off CGT boost.

Most of our clients appear to accept that tackling the fiscal deficit is essential and that certain tax increases may be unavoidable in the short term. If CGT is to make a contribution, the question remains whether this can be achieved in a way that meets the coalition government’s stated objectives for tax reform: to be more competitive, simpler, greener and fairer.

Taxing question
The question for the chancellor is: what CGT rate would the majority of capital gains taxpayers be willing to suffer without a material distortion of their actions?

We are convinced that this rate is nearer to 20% than 40% because property investors view tax levied upon their real estate portfolio differently from tax upon their rental income.

Although there are a range of options, the simplest and fairest is to recognise that lower rates of tax for longer-term capital gains are far less likely to distort property investment behaviour. Accordingly, we have already recommended a simple regime is adopted whereby assets held for less than two years are taxed at 40%, assets held for at least two years are taxed at 25% and qualifying business assets remain taxed at 10% up to a more generous lifetime limit of £5m.

We consider that there is no reason that business assets should exclude property investments, assuming these are owned by entrepreneurs who devote most of their time to their property business.

In the meantime, what is the property investor to do?

Tax advice to the fortunate few property investors who qualify for the existing entrepreneurs relief is clear: they should do nothing and await the proposals announced in chancellor George Osborne’s emergency Budget on 22 June. Unfortunately, it is only a tightly defined section of the property industry that could qualify for this relief, among

them certain investors in hotels, farmland and, potentially, businesses such as residential healthcare and self-storage.

Property investors who have imminent potential purchasers are well advised to consider the effect of CGT in their negotiations with the purchasers. In essence, they will need

to demonstrate that they have “an unconditional contract” in place by 21 June if they fear that the chancellor might be tempted to introduce a CGT rise from Budget day.

Property investors without a potential purchaser but with the same concerns about the date of introduction of a CGT hike, should discuss with their tax advisers the pros and cons of a disposal of their properties to, for example, a family trust, noting that this might secure the existing 18% CGT rate but will create a CGT liability payable by 31 January 2012.

Retro moment
The points above disregard the possibility of the chancellor backdating any CGT hike to the start of the tax year, 6 April 2010. Although this is within parliament’s powers, I would

be very surprised if a coalition chancellor were to take this draconian approach.

And let’s hope that the government returns to the recent practice of announcing tax policy changes in the December pre-Budget report, to permit reasonable debate before their enactment after the Budget in the following spring.

Stephen Herring is real estate and construction tax partner at BDO

Read more

Source: Property Week (www.propertyweek.co.uk)