Last weeks budget had the potential to negatively affect the housing market, and stall the recovery in prices that has been taking place in some parts of the country. It had been trailed by I believe government sources that capital gains tax could rise from 18% to an eye watering 50%. However, after an aggressive media campaign the increase has been restricted to 28% for higher rate tax payers.
Although on the face of it this is good news for buy to let investors, there is a sting in the tail for standard rate tax payers as any gain is added to your income and you could end up paying 28% on most of your gain. For example, if someone has taxable income of £25,000 per year and sells a second property for a £50,000 taxable profit, they will pay higher rate capital gains tax on any taxable income that takes them past £37,400 taxable income where higher rate tax starts. Our example shows that even someone comfortably paying standard rate tax can be caught paying higher rate capital gains tax on £37,600 of their gain, if they sold this year. Unfortunately, the new rates make it difficult to avoid the higher rate tax with houses involved, as opposed to shares where for example a £50,000 taxable gain could be spread over a number of years by selling just to the end of your standard rate entitlement each year.
However, if you prefer investing into houses rather than shares and want to avoid higher rate capital gains tax there are some measures you can take. Firstly, you can buy lower priced properties, and then secondly turn them over more quickly to take advantage of the tax breaks. Of course this strategy has to be weighed against the cost of buying and selling and finding other similar properties in the market.
With regard to holiday homes the news is better. This government has reversed Alistair Darling’s decision to abolish tax breaks on them, and they have extended this perk to include properties in Europe. Briefly, provided you have furnished lettings and you make them available for letting for 140 days a year and actually let them for 70 days on short lets, you can offset the costs of running and maintaining the property against income. This can be a very valuable tax break for a higher rate tax payer who lets it out for 70 days only as it allows them to offset the loss against their higher rate tax bill. With holiday homes there are also potential capital gains tax advantages. For example, a holiday home owner can delay paying capital gains tax by selling their existing holiday home and investing the proceeds into another one.
Overall, although buy to let landlords appear to have got off relatively lightly in the Budget with the changes in capital gains tax most homeowners are worse off with regard to take home pay. This squeeze when it bites I believe will overshadow the recovery of the housing marketing in this area, as many families are already hard pushed. Although many may wish to move, I believe in the short term many will just hunker down and absorb the cuts in take home pay and the pay freezes that will filter through from the public sector in particular. With all the changes happening and the possibility of interest rates rising I believe it could be worth having a financial health check with an Independent Financial Advisor in attempt to control outgoings as real incomes shrink for many.
Kieron Bassett Financial Services have two Independent Financial Advisors. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.
Kieron Bassett CertPFS