EMERGENCY BUDGET: implications for the property sector
Many will have been dreading chancellor George Osborne's first Budget but, overall, it proved less damaging than was feared for the property market.
Capital Gains Tax
The introduction of a new 28% capital CGT rate takes effect from June 23 2010. The new rules hark back to the pre-2008 CGT regime, with gains being added to an individual’s annual income to decide which tax rate is to be applied.
Gains falling within the basic rate band will be taxed at 18%, gains falling in higher bands will suffer CGT at 28%. For example, an investor with income of £25,000 in the current year who realises a gain of £30,000 (after using capital losses and his or her annual exemption) on selling shares will pay some CGT at 18% and some at 28%.
Gains arising before 23 June 2010 will continue to be liable to CGT at 18% and will not be taken into account in determining the rate or rates at which gains arising on or after June 23 2010 will be charged.
Gains which had been deferred (such as under the enterprise investment scheme) and which crystallise on or after 23 June 2010 will be subject to the rates applicable at the time that the gain crystallises.
Taxpayers will be able to deduct capital losses and the annual exempt amount (£10,100 in 2010/11) in a way which minimises the tax due. For example, a taxpayer who incurs a gain in May 2010 taxed at 18% and another gain in November 2010 taxed at 28% may off-set losses or the annual exempt amount against the later gain.
While this increase may not wipe out demand for investment property, the Chancellor will announce the rates of CGT for 2011/12 in the 2011 Budget and the nil band of Stamp Duty for first-time buyers is to be reviewed, so there may be more bad news next year.
Furnished holiday lettings
The chancellor has confirmed the good news that the tax rules applicable to furnished holiday lettings will continue to apply to properties in the UK and elsewhere in the European economic area in 2010/11.
Broadly speaking, these rules allow holiday lettings that meet certain conditions to be treated as a trade for some specific tax purposes.
The government will consult over the summer about plans to change the tax treatment of FHL from April 2011: some tightening of the current rules is expected.
The standard rate of VAT will rise from 17.5% to 20% from January 4 2011. The rate rise represents an additional expense for consumers and organisations (such as charities and partly exempt businesses) that are not entitled to recover all the VAT they incur on building costs.
For the flat rate scheme, HMRC has announced the new flat rate percentages to be used from January 4 2011.
The main rate of Corporation Tax will reduce to 27% from April 1 2011 and to 24% by April 1 2014: the small companies’ rate will reduce to 20% from April 1 2011. However, the changes to employers’ national insurance contributions planned for 2011/12 have only been softened a little and many employers will see their costs rise.
For qualifying business owners, the CGT rise on non-business assets was sweeted by the good news of a nearly sixfold increase in the maximum value of entrepreneurs’ relief – it is now worth up to £900,000.
Marios Gregori is a tax partner at accountancy and business advisory firm PKF.
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