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Capital Tax Planning

Capital Tax Planning
Most people, property owners especially, will have heard about the capital gains tax changes that will come into effect from 6 April 2008.

 

Quite whether it will affect us individually can be an enigma, especially as the changes are so extensive.  So, how can we be sure how it will affect us and our investments?

 

Business Property

 

Since 6 April 2004, a landlord has been entitled to the business asset taper relief in respect of property occupied by an unincorporated or incorporated trading business that is not listed on a stock exchange.

 

This means that, currently, any capital gains on this type of property would be tapered by business asset taper relief of 75% after two years of qualifying ownership for this purpose, and the effective rate of tax for a higher rate taxpayer would be 10% of the gain.

 

From 6 April 2008, these gains will no longer be indexed or tapered and the gain will be chargeable at 18%, whatever tax bracket one happens to be in.

 

Even the introduction of the new Entrepreneur’s Relief may not help these landlords, since the letting of property to a business is not necessarily a qualifying purpose for this new relief, as there will be stricter criteria.

 

There is a possibility therefore for owners of this type of property to be worse off by the new rules that will come into effect on 6 April 2008.

 

There is still time however………..

 

Although it may be too late to secure a buyer for property in time for the change, especially with existing tenancies in place, some tax planning may be done to make maximum use of the business asset taper relief to date.

 

One option may be for owners to gift the property into a trust. 

 

Many different types of trust are available, and all options can still give the current owner ‘control’ (ie, management) of the property if this is preferred. 

 

The gift of the property into trust would trigger the following tax events:

 

Capital gains tax – this gift would be a chargeable event at the market value of the property on the day of the transfer.  Business asset taper relief would be claimed and a smaller tax liability could be payable.

 

Stamp Duty – no stamp duty would be payable on a gift into the trust as no consideration has passed.  If any consideration is paid for the property however, stamp duty would need to be considered.

 

Inheritance Tax – The gift into a trust would also be a chargeable occasion for inheritance tax.  This would be treated as a chargeable lifetime transfer (CLT). 

 

Everyone has a Nil Band of £300,000 (currently for 2007/08) that could be used to cover against a CLT.  Of course in the case of jointly owned property, perhaps with a spouse, the amount of the Nil bands available to set against a CLT would be £600,000 provided this had not been previously used in the last seven years. 

 

In addition to this, property that is used by a trading partnership or a trading company of which the owner has control will usually qualify for Business Property Relief (BPR) of 50% of the value.  There are a few criteria, such as the minimum time period of two years, but it is certainly worth considering if any balance in value is also covered by Nil Rate Bands, as detailed above.

 

If the current owner was also prepared to no longer benefit from the property, an additional advantage of gifting the property into trust at this point in an owner’s life is that the property could then be removed from their estate for inheritance tax purposes.  And, provided the owner lives for seven years, there is unlikely to be any additional inheritance tax due. This plan may be beneficial in comparison to the 40% inheritance tax charge on death if the property was still owned individually. 

 

There would be periodic charges of up to 6% max each 10 years and ‘exit charges for any transfers of property out of trust, however depending on the numbers going into the trust, this is sometimes as little as 0%. 

 

VAT - There are no VAT issues unless the property has been ‘opted to tax’

 

 

Agricultural property

 

Owners of agricultural property or farms could also be largely affected by the introduction of the new capital gains tax rules, especially where these properties qualify fully or partially for business asset taper relief. 

 

In addition, where this type of property has been in the family for a very long time, the current indexation allowance for the inflation over the years could be substantial, which could make the new regime less beneficial.

As far as Inheritance tax is concerned, Agricultural Property Relief (APR) and Business Property Relief (BPR) may provide exemption for these transfers.

Shares of companies owning property

 

The new Entrepreneurs Relief that will also come into effect on 6 April 2008 will not apply to shares in companies where the activities are less than 80% trading.  Therefore, for those companies for which property is a large activity, this relief will not apply, which makes a comparison of the potential capital gains tax due, before and after the changes, all the more important. 

 

Ownership of property through a company will not qualify for Business Property Relief for inheritance tax, unless the business is ‘wholly or mainly’ trading.  This is open to interpretation and every case is assessed on its own merits.

 

However, it is still worth carrying out a comparison under the old and new rules.

 

It is possible to gift shares into a trust in the same manner as the property above, if this is appropriate.

 

Investment property and second homes

 

Investments in residential properties are non-business assets for taper relief up to 5 April 2008 and therefore the new rate of 18% on chargeable gains may be more beneficial despite losing the indexation allowance and taper relief.  However, it is still worth doing the numbers to check the position.

 

If the smaller amount of capital gains tax would be chargeable before 6 April 2008, then the trust route could be an option for the owners.  Inheritance tax reliefs may not be available, but using a single, or two Nil Rate Bands of £300,000 could be useful and the overall effect could remove property from one’s estate in the process.

 

Conclusion

 

So despite the changes, there is still time to minimise your tax liabilities as much as possible……..

 

Consider the options before the capital gains tax changes come into effect from 6 April 2008.