You’ve got to feel sorry for Alistair Darling. Not only is his first budget widely assumed to be a disaster before he even gets his papers out but it will be to a large degree over shadowed by delayed measures from his predecessor.
Even if he – as the BBC puts it – “stood up on budget day, said nothing and then sat down again” there would still be more than 30 changes to deal with, some announced in last year’s budget and some in Darling’s pre budget report. Some aren’t particularly interesting. Others are. And the most interesting of all, or the most controversial of all –depends how you look at it – are the changes to capital gains tax.
At the moment about 250-260,000 people a year end up paying CGT with the total take coming in at not far off £5bn. However they pay it in an absurdly complicated way based on a variety of taper reliefs and inflation related indexations. This is changing: from April CGT will be applied at a flat rate of 18%. The only exception will be for entrepreneurs who will have a life time allowance of £1m of profits they may make from selling businesses. This will be taxed at just 10%. We’ve written endlessly in MoneyWeek about our feelings on this (we don’t think it is much of a big deal to be honest – see: Why you should ignore the CGT whiners) but the question now is what investors should do about it.
Prêt a profits
If you aren’t ever going to have capital gains of more than £9,200 a year the answer is probably nothing – it makes no difference to you either way. So that’s most of us safe. If you are, it might be worth selling up now. Business owners all over the country are doing just that (their CGT goes up from 10% to 18%) with accountants reporting huge work loads in the run up to April.
Even the biggest of private companies have found themselves under pressure: Prêt a Manger had been planning a £400m float but has ended up selling in a buy out for a mere £345m instead. That means that they’ve taken a hit of a possible £55m on the price (though in this environment £400m was probably pushing it) but that they’ve paid only £34.5m (10% of £345m) in tax instead of £72m (18% of £400m).
The next group of investors who need to have a think are those with large numbers of shares held in Save as You Earn (SAYE) schemes – i.e. a number worth more than the £9,200 capital gains tax limit. Consider, says Neil MacGillivray of James Hay in the Independent, the case of someone with £20,000 worth of SAYE gains. Even if you have only held the shares for a few years you should be eligible for 75% taper relief. That leaves only £5,000 as taxable income which is under the limit and not a problem. Under the new regime things are simpler but not so good: £10,800 would be subject to 18% tax and you’d end up with a bill of £1,944. So selling under the old might be a good idea if the prospects for your company don’t look too hot at the moment (which given that we are headed for recession they probably don’t).
Why not just sell now?
Finally there are the buy to let investors. There is no longer any pretending that the UK housing market is not a mess. It is. According to the Royal Institute of Chartered Surveyors 64.1% more surveyors across the country are reporting falls in house prices than are reporting rises. This figure is close to the record reported in June 1990 when 64.5% reported falls. A clear majority of surveyors are also reporting a fall off in the number of buyers around while the stock of unsold property is rising fast. So will you get a better price after April 5th than you will now? I doubt it. So why not just get out now and save what you can?
You will say that this seems mad given that if you sell right now you’ll end up paying 40% on your gains, whereas if you wait you’ll pay only 18%. And in that sense you’ll be right. But what if you think not of the tax but of the price itself? Right now you might have a chance of getting rid of your buy to let at a reasonable price. That may well not be the case in April when all the other buy to let ‘investors’ who are having trouble meeting their mortgage payments suddenly rush to sell in a effort to salvage something from their properties.
Say you have a house you think you can sell for £150,000 making gains of say £100,000. Dump it now – and you’ll pay a maximum of 40% on £90,800 assuming you are a higher rate tax payer, a total of £36,320 leaving you with £54,480. I say a maximum because you’ll probably pay less if you’ve held the property for some time (under current regulations you get taxed on only 95% of the gain after three years rising to 60% after 10 years). If you’ve held the house for ten years, your tax bill will be not much more than £21,000.
Sell the next tax year for the same price and you’ll pay 18% on the profits – £16,344 – leaving you with a nice £74,456. But only if you sell for the same price. Which you might. But you probably won’t. If I had a flat I’d held for ten years I’d be very sorely tempted to forego the chance of a slightly lower tax bill and rush to the market now. Indeed even if I’d only had it a couple of years I think I’d be thinking about it: there’s always something satisfying about getting out before the rush particularly when that rush is likely to savage prices.
I’ll be away for the next month. While I’m away I’ll be leaving Money Sense in the capable hands of MoneyWeek’s associate editor Tim Bennett.