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Understanding Capital Gains Tax

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By - Thursday 20 May 2010

May 22nd is the day that all UK-based property investors are likely to be waiting for with bated breath after new chancellor George Osborne announced that the first Lib Dem/Conservative emergency Budget will be held on that date.

Less than three years ago, then-chancellor Alastair Darling changed the law surrounding capital gains tax (CGT) by sweeping away various reliefs in return for a low flat rate of 18 per cent. It looks like his reforms are set to change.

The new government has already hinted at an increase in the current rate of CGT, which would spark outrage among many property investment entrepreneurs in the Buy to Let sector and perhaps precipitate a rush of individuals attempting to capitalise on the current low rate.

What Does it Mean?

According to the coalition agreement, CGT will be raised to a rate similar to that of income tax. This means that individuals with a property investment portfolio are likely to be paying a rate of either 20, 40 or 50 per cent, representing a significant hike.

The two parties claim that the increases will be for "non-business assets". This implies that investors, Buy to Let landlords and second homeowners are likely to be the ones who bear the brunt of the higher tax rate.

However, in the government's proposals it stated that "generous exemptions" would be given for "entrepreneurial business activities", leading to calls from the National Landlords Association (NLA) to include landlords in the exemptions.

The NLA argues that introducing the reforms will have a negative effect on the revival of the UK property market and claims that the government should place more focus on encouraging investment in residential property.

What Now?

Obviously the most important issue on government ministers' minds is reducing the 163 billion GBP deficit and to them a rise in CGT seems like an ideal way to raise some cash. As such, it may be that the increase will act as a short-term fix and therefore could eventually be repealed.

This could be good news for established Buy to Let landlords who are in the sector for long-term rental income rather than short-term capital gain, as they are likely to hold on to their real estate and maybe ride out the storm.

What overall effect that the new rules are going to have on the market is pure speculation until the full plans are released, but it seems fairly likely to assume that those who invested in property are set to be in an un-celebratory mood following the announcement.ADNFCR-3415-ID-19787519-ADNFCR

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*This page is provided for information purposes only and should not be construed as offering advice. IPIN is not licensed to give financial advice and all information provided by IPIN regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.


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