Who wins and who loses from capital gains tax changes?

At a recent speaking engagement to a professional group of property investors I was asked who wins and who loses from Capital Gains tax Changes?
Well, let’s see.
Currently CGT for most investors is levied at 100% of any net gain they make after deducting buying and selling costs after deducting their £9,200 allowance if they sell within 3 years.
The charged rate is then 40% if they are higher rate taxpayers and 20% if basic rate taxpayers. However, something called Non Business Asset Taper Relief then came into play which means that after the first three years of owning a buy to let you get to effectively knock off 5% of any net gain.
This then “tapers down” by further lumps of 5% each year, up to the 10th year of ownership so that by year 10, a maximum 40% taper is applied.
So, when you get to the maximum taper relief available of 40%, this means you would only be taxed at 60% of the capital gain.
If you are a higher rate taxpayer and pay 40% capital gains tax rate, the “effective” rate of tax you would pay on the gain after 10 years would be 60% X 40% = 24%.
If you are lower rate taxpayer you pay 60% x 20% = 12%
(To complicate matters, you should note also, that if you owned the property before 1998, for any period up to march 1998, you benefit from another sliding scale called “indexation allowance” which reduces the taxable gain by the rate of inflation up to 1998 but let’s not go there!)
Now to the easy bit!
With Darling’s changes, (which take effect for asset sales after 5th April 2008) both these sliding scale CGT rates are to be abolished and replaced with a single CGT rate of 18% no matter how long you owned the property.
So, if you are an investor and pay tax at the higher rate of 40%, you are a clear winner as 18% is always less than the best rate you could have got under the old regime (i.e. where the property was held for 10 years or more) of 24%.
The biggest gainers of all are higher rate taxpayers who have held property for less than 3 years whose “effective” CGT rate will drop from 40% to 18%.
Even if you are a basic rate taxpayer, any significant gains you make could push you into the top rate of tax, thus meaning that the new regime may be better for you too.
If, however, you are a lower rate taxpayer and your gains would not push you into the 40% tax bracket, then you would be worse off under the new system only if you have held the property for more than 4 years. If you are one of these and you are thinking of selling, then do so now as you will pay more after April.
Second home owners – most of whom are higher rate taxpayers - are also big winners of course - and this change could make prices of properties in coastal and rural areas, particularly go up further.
Since most UK buy to let investors and second home owners are higher rate taxpayers, there will be a lot of people waiting until April before they complete on second property sales.
Of course, in general this change will make buy to let and second home owning more attractive still - and attract entrants into the market, thus possibly buoying up the housing market at a time when it looks shaky.
Judging by the amount of enquiries I now get from banks and building societies interested in my consulting services to help them improve their buy to let mortgage products, I think the buy to let arena is surely set to grow -and this fillip to tax will only help matters.
Finally, a footnote, the tax changes are not so good, however, for owners of furnished holiday lets. They will be worse off and I will look at this in the next blog.
Finally, tax is complicated, so if you are considering what to do, take advice from a financial adviser familiar with residential property taxes.
If you need more advice on capital gains tax or property tax please ask me. I’m David Lawrenson from property investment advisers www.lettingFocus.com
I’m the author of property book “Successful Property Letting - How to Make Money in Buy to Let”
I’m an expert on buy to let mortgages and a well known freelance property journalist and I contribute to newspapers and a host of property websites, write a property investment blog and run a landlord advice and mentoring service
You can read more of my landlord blog and details of my networking, advice, property seminar programme at my website www.lettingfocus.com.
My next London property networking meeting is on November 14th. Click here for details: Property Investment Seminar
What’s unique about lettingfocus.com is that we offer independent property investment advice because unlike most people in the buy to let and property “advice” business we are not linked to a property company, developer, agent or bridging loan financier and do not receive commissions from any of these sources.
If a property investment is lousy – We’ll tell you straight and we will tell you all about buy to let and property investment - the good and the bad and we won’t make silly promises that you’ll become a millionaire overnight.
Copyright: David Lawrenson 2007. This blog is updated at least twice a week

How are Tenancy Deposit Schemes Faring 6 Months On?

How are tenancy deposit schemes faring 6 months after they started?
At a recent speech I gave to a trade association, the question of tenancy deposit schemes was debated strongly – so I thought it was time that we looked at this again.
Just to recap, if you take a deposit on a NEW tenancy that started on or after 6th April 2007 in England or Wales you have to protect that deposit in one of the tenancy deposit schemes.
There are two types of tenancy deposit schemes: a “custodial” scheme where a third party holds the deposit; and an “insurance” scheme where the landlord may hold it.
You have to tell tenants which scheme they are in within fourteen days of receiving the deposit. If you don’t join a scheme, penalties include having to pay the tenant an amount of three times the deposit. Also, you will be unable to regain possession under the so-called “accelerated possession procedure”.
Now, the custodial scheme is free - the running of it paid for by interest on landlords’ deposits, whilst there is a cost for the insurance scheme option.
However, the insurance scheme does have the neat advantage that it allows landlords to hold onto the deposit (rather than pay it into a scheme as is the case with the custodial scheme).
And with the insurance scheme, only if at there is a dispute at the end of the tenancy must the landlord lodge the disputed amount with the scheme.
There is just one custodial scheme at www.depositprotection.com (Tel 0870 7071707) but there are two insurance-based schemes. One is run by Tenancy Deposit Solutions at www.mydeposits.co.uk (0871 7030552) and the other is run by the Dispute Service Ltd www.tds.gb.com (0845 226 7837) and is mainly targeted at agents, though both landlords and agents are free to join any scheme.
The new schemes make it even more important that landlords do a thorough inventory at the start of tenancies, to reduce the chances of disputes at the end.
So how is it going after 6 months?
Well, latest figures from a reader survey for “Landlord” magazine show that 23% of landlords are choosing not to take a deposit at all, 49% are going for the Deposit Protection Service (DPS) (the custodial scheme) while of the insurance based schemes, the clear favourite seems to be the Tenancy Deposit Solutions scheme with 17% with the Dispute Service accounting for 1.4% of respondents to the magazine survey
Another 8% of respondents have opted for separate insurance based solutions which fall outside the formal tenancy deposit schemes.
Rather scarily, claims seem to be running higher than anticipated in the custodial scheme. Also, rather worryingly, the Residential Landlords Association report that of 2,000 claims, only three have proceeded to dispute resolution but none has yet been to adjudication. Oops!
Of the 2,000 claims, 400 were ‘single’ claims, whereby either a landlord or tenant can ask the DPS to settle the deposit in the absence of the other. Again, this figure is far higher than was anticipated. (Many of the 400 claims are made by landlords after a tenant has left, owing the last month’s rent.)
Landlords should note that with the custodial scheme, they can only recover the money by filling in a Statutory Declaration from the scheme and getting it witnessed by a solicitor, which is a real pain.
By contrast, the process for ending a deposit registered under the insurance based Tenancy Deposit Solutions seems much easier from my experience -and I am personally surprised that more landlords have not bitten the bullet, paid the fee to join an insurance based scheme (about £30 per deposit once you have paid the small joining fee) which would at least give them control of the deposit and easier access to it at the end of the tenancy.
Maybe, some are too mean to pay the fee.
Now, I am the first to say that the admin involved with the Tenancy Deposit Solutions is a bit of pain, For a start, you are supposed to write to tenants and get a deposit protection certificate signed for each deposit, and keep a copy (as if landlords and tenants have got nothing better to do!)
Also, you are supposed to give a tenant’s alternative address to the scheme (though I have found they will often waive this onerous requirement.)
All a bit of a pain - and it adds up to a lot of work, especially for those in the student and / or HMO market, where turnover of tenants is high, because landlords are supposed to notify and protect a deposit each time a new agreement is made and also notify the scheme if the “lead tenant” changes. (And it is because of the workload that some landlords are using alternatives such as separate insurance based alternatives which fall outside the formal schemes.)
But now I have done deposit protection in the insurance schemes a few times, it’s not too bad -which is what delegates at the speech told me too.
But the extra admin has a cost. So, I am now charging tenants for all the "on boarding admin" and reference checks - something I used to do for free.
Please write and tell me your experiences of the schemes –both good and bad.
If you need detailed advice on tenancy deposit schemes please ask me.
I’m David Lawrenson from property investment company www.lettingFocus.com
I’m the author of buy to let book “Successful Property Letting - How to Make Money in Buy to Let”
I’m an expert on buy to let mortgages and a well known freelance property writer and I contribute to newspapers and a host of property websites, write a property investment blog and run a landlord coaching service
You can read more of my landlord blog and details of my networking, advice, property mentoring programme at my website www.lettingfocus.com.
My next London property networking meeting is on November 14th. Click here for details: Property Investment Seminar
What’s unique about lettingfocus.com is that we offer independent property investment advice because unlike most people in the buy to let and property “advice” business we are not linked to a property company, developer, agent or bridging loan financier and do not receive commissions from any of these sources.
If a property investment is lousy – We’ll tell you straight and we will tell you all about buy to let and property investment - the good and the bad and we won’t make silly promises that you’ll become a millionaire overnight.
Copyright: David Lawrenson 2007. This blog is updated at least twice a week