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Capital gains tax on premises profits

Don't allow proposed tax changes to rush you into selling surgery premises, says Valerie Martin.

The dust is just beginning to settle after the Chancellor Alistair Darling's bombshell in his pre-Budget report last month proposing sweeping changes to the capital gains tax (CGT) regime from 6 April 2008.

These changes potentially hit GPs owning their surgery premises very hard. If they go ahead in 2008/9, a favourable tax regime, which over many years has been designed to encourage investment in business, will be wiped away.

Since 1998, business taper relief has removed from tax up to 75 per cent of the chargeable gain on the sale of business assets, leaving effectively a 10 per CGT charge for top-rate taxpayers.

Before that, a relief called indexation relief reduced the capital gain by increasing the cost of an asset to take account of inflation from March 1982 or the purchase date - which ever was later - until indexation relief ended on 5 April 1998.

Although no further indexation was available from this date, the relief accumulated was frozen rather than abolished. So GPs who have owned their surgeries or a share in them since before March 1998 currently benefit from both indexation relief and taper relief.

The Chancellor's proposals would sweep away all of this preferential treatment, replacing it with a simplified system of a flat 18 per cent tax rate applicable to the profits on all disposals of capital assets.

There would no longer be a reduced CGT rate for business assets (as opposed to personal assets such as investments).

Nor would there be any reduction for having owned an asset for several years, rather than just buying and then selling soon after to make a quick profit.

Surgery owners
So what can GP surgery owners do? The most important thing is not to rush into selling your share of the surgery purely for tax reasons.

These changes are only proposals at present and an unprecedented alliance between the Confederation of British Industry, the Federation of Small Businesses, the Institute of Directors and British Chambers of Commerce endeavouring to persuade the Chancellor to at least modify his plans.

There is a possibility that the old reliefs might at least be frozen at March 2008 values so that indexation and taper relief could be available until then.

If you would otherwise not be selling up in the foreseeable future, it is prudent to hold back for a little while to see what happens rather than selling a good investment in a hurry.

An alternative would be to transfer it into a trust to trigger a CGT charge under the current rules but still retaining ownership.

If you are approaching retirement and would be selling your share of the surgery next year anyway, it certainly makes sense to look at bringing that sale forward to the current tax year rather than risking a higher tax charge in 2008/9.

If you have only bought into the surgery recently, there will be little gain to protect.

With a little luck, you will own your premises share for long enough for a more beneficial change to the CGT rules to come into play.

In the meantime this black cloud does have a silver lining if you own a buy-to-let property or a second home in the form of a greatly reduced tax charge on selling.

Under the proposed rules, you would only pay tax at 18 per cent rather than 40 per cent - or at the 24 per cent investment gains rate if you have owned the property for 10 years.

Valerie Martin is a partner and National Director of Medical Services at specialist medical accountants PKF (Tel: 01483 564646)

A GP who bought a premises share for £200,000 in November 1985 and
sells it for £500,000:
  Current capital gains tax rules Proposed rules from 6 April 2008
Sale proceeds £500,000 £500,000
Less cost  (£200,000) (£200,000)
Un-indexed gain £300,000 £300,000
Indexation allowance (£139,000) Not applicable
Not applicable Not applicable £161,000
Less taper relief @ 75% (£120,750) Not applicable
Less annual CGT exemption  (£9,200) (£9,400)*
Taxable gain £31,050 £290,600
Capital gains tax @ 40%

@ 18%

Increased tax bill under proposed rules: £39,888
* estimated

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