http://www.landlordzone.co.uk/blog/newsletters/landlordzone-newsletter-april-2008-the-budget-review The LandlordZONE Weblog - news, economic and legal developments, current affairs and a knowledgebase for those involved with Rental Property, residential and commercial: Investors, Landlords, Property Managers, Letting and Estate Agents, Tenants and Professionals. Sun, 20 Jul 2008 07:28:57 +0000 http://wordpress.org/?v=2.5.1 http://www.landlordzone.co.uk/blog/newsletters/landlordzone-newsletter-april-2008-the-budget-review#comment-6178 Robin Pearce Sun, 27 Apr 2008 22:05:09 +0000 http://www.landlordzone.co.uk/blog/?p=415#comment-6178 If one owns a residential investment property for any length of time, one might expect part of the gain to be exempt from Capital Gains Tax (CGT) since part of the gain is due inflation linked to the retail price index. This part is in effect not a real gain because of devalued due to inflation. A simple example might be a £100k property appreciating £30k over ten years whilst accumulated inflation for example might = 30% over ten years. In this case in real terms there is no gain. Until 1998, indexation relief allowed for the fact that part or sometimes all of a gain is not real. Indexation was replaced in 1998 with taper relief that limited the exemption of the gain to 40% over ten years. In his 2008 budget Mr Darling has dispensed altogether with any allowance for inflation. The notion of taxing a gain that isn't real seems rather unfair. Landlords planning to sell one long term owned property each year up to retirement assuming they weren't into the 40% tax band, would have paid the standard CGT rate of 20% less 40% taper relief = 12% CGT, assuming they had no other significant income. Now they will now have to pay 18% CGT on the taxable part of the gain. There is no relief even though most landlords set up property portfolios as a long term investment to be their pension. This has to be the only type of pension that had no tax allowances given… harsh indeed. On the other hand those that have bought property & run it as a hotel or other commercial basis pay only 10% CGT on the 1st million of gain when they retire. This is fair. Residential landlords however now have no way out of avoiding 18% CGT. One advantage of the budget is for those that wish to sell off high value amounts of properties in one year, the rate will now be 18% rather than predominantly 40%. Either way there is no longer any incentive to hold onto properties for 10 years to get the 40% taper relief. This could mean less security of tenure for tenants because landlords will be more likely to bring about an end to tenancies than before. If one owns a residential investment property for any length of time, one might expect part of the gain to be exempt from Capital Gains Tax (CGT) since part of the gain is due inflation linked to the retail price index. This part is in effect not a real gain because of devalued due to inflation.
A simple example might be a £100k property appreciating £30k over ten years whilst accumulated inflation for example might = 30% over ten years. In this case in real terms there is no gain.
Until 1998, indexation relief allowed for the fact that part or sometimes all of a gain is not real. Indexation was replaced in 1998 with taper relief that limited the exemption of the gain to 40% over ten years.
In his 2008 budget Mr Darling has dispensed altogether with any allowance for inflation.
The notion of taxing a gain that isn’t real seems rather unfair. Landlords planning to sell one long term owned property each year up to retirement assuming they weren’t into the 40% tax band, would have paid the standard CGT rate of 20% less 40% taper relief = 12% CGT, assuming they had no other significant income. Now they will now have to pay 18% CGT on the taxable part of the gain. There is no relief even though most landlords set up property portfolios as a long term investment to be their pension. This has to be the only type of pension that had no tax allowances given… harsh indeed.
On the other hand those that have bought property & run it as a hotel or other commercial basis pay only 10% CGT on the 1st million of gain when they retire. This is fair. Residential landlords however now have no way out of avoiding 18% CGT.
One advantage of the budget is for those that wish to sell off high value amounts of properties in one year, the rate will now be 18% rather than predominantly 40%. Either way there is no longer any incentive to hold onto properties for 10 years to get the 40% taper relief.
This could mean less security of tenure for tenants because landlords will be more likely to bring about an end to tenancies than before.

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