Cash Clinic: Don't base decision to sell your buy-to-let property simply on the new tax regime

Question

Before the property boom, rather than investing in a pension, I bought a second property to let out, with the intention of selling it sometime this year. However, as a result of the Chancellor's emergency Budget I have serious concerns about how increases in capital gains tax and VAT will impact upon my investment. How would you advise that I best proceed? Should I keep my property or sell up now? And do you think buy-to-let investments should be avoided as a result of the recent tax hikes?

ND, Penicuik

Answer

You are correct in your assumption that, following the emergency Budget, should you be subject to higher rate tax, any gains from your buy-to-let property will be subject to capital gains tax (CGT) at 28 per cent, after the deduction of any allowable expenses and exemptions. If you are a basic rate taxpayer, with annual income and gains of under 37,400, the charge remains at 18 per cent.

Although the more well off are seeing a jump of 10 per cent in CGT, one may consider that the rate remains reasonably low when compared to the highest marginal rate of income tax of 50 per cent. A CGT charge at the same rate will of course be levied on any profit that you may make on other investments i.e. stocks and shares, and not just heritable property. As the new rates came into force immediately on midnight on 22 June, rather than the usual delay until the next tax year beginning on 6 April 2011, any sales made now will be subject to the higher rates announced.

The rise of VAT to 20 per cent in January will of course impact everyone, with the cost of goods and services rising pretty much across the board. Remember, however, that if your business is VAT registered you will be able to claim back any VAT suffered at this new rate also.

Your decision on whether to retain your investment in the buy-to-let market should not be totally dependent on the current tax regime, as many other factors come into play in making any investment plans. Decisions should rarely be made for taxation reasons only. Among other things, the location of your property is important, both from the point of view of capital growth, and the ease of letting, whether you require easy access to your capital, the cost of money and the spread of any other assets you may hold.

• Glen Gilson is partner and head of private client and financial services at HBJ Gateley Wareing

• If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].

This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.