International law firm Pinsent Masons has warned the property industry that the new coalition government's taxation plans are likely to impact much harder than some more hopeful commentators have suggested.
Pinsent Masons legal director Jennie Newton said: "One point that is fairly clear is that there will be a Capital Gains Tax (CGT) hike for non-business assets. What is not clear is what non-business assets are. The suggestion by property consultancy DTZ is that property portfolios will be classed as business assets for these purposes. We are sceptical - it is more likely the Government will revert to something closer to the old "business asset" test under taper relief which only treated assets used in trades or shares in trading companies as business assets. Property investment businesses were not treated as trades for these purposes and if this treatment is followed, investors selling shares in property investment companies may pay CGT at the top rate."
Newton added: "If the suggested cut in the CGT annual exemption from £10,000 to £2,000 also goes ahead, this could have a significant effect on the buy-to-let market and the combination of CGT changes may trigger a rash of sales in this sector. A related factor is that the potential future tax breaks for investors discussed in the recent Treasury consultation "Investment in the UK Private Rented Sector", being the reformation of SDLT on bulk purchases of property and the establishment of residential REITS, have probably been quietly shelved for the time being."
Pinsent Masons senior associate Mike Hunter said: "Another point that seems clear is that corporation tax rates will be reduced from the current 28% rate to 25%. The BPF are speculating, understandably, that this will be financed by a reduction of some kind in capital allowances. Bearing in mind some of David Cameron's comments about financing the reduced rate by simplifying complex reliefs and allowances, this seems a fair guess of things to come."
Hunter raised additional issues including the possibility of further SDLT anti-avoidance rules to attack perceived avoidance through use of offshore structures as proposed by the Liberal Democrats, whose tax avoidance agenda is to be developed. He said: "Our initial thoughts are that this is likely to involve a tax charge on transfers of units in offshore unit trusts or shares in offshore companies."
He added there was an unspoken but widely suspected possibility of a VAT increase which could affect partially exempt or non-business (though probably not residential) occupiers. "No further comments have been made in respect of the Liberal Democrat proposal to charge VAT at the standard rate on new homes and residential developers will be praying that this idea has fallen by the wayside."
"We hope more details will be released in the run-up to the emergency Budget expected in June/July." He added.
Source: Brown Lloyd James Financial