I bought a flat in 1983 for £25,000 and have not lived in it for 32 years since. I think the flat is now worth in the region of £385,000. How much capital gains tax would I pay if I sold at this price? Is there any taper relief or exemption that could reduce the CGT bill?
(via email)
Jackie Hall, Tax Partner at Baker Tilly, writes: "As you have not lived in the property at any stage you are not eligible for any form of private residence exemption. You will be taxable on the increase in value, ie £360,000. If you have carried out any capital works on the property over the years, such as structural alterations, the costs of these could also be deducted from your gain.
"If you have any brought-forward capital losses or capital losses arising in the same tax year these could be set against your gain.
"Assuming you have no other taxable disposals in the year, and sold in 2015-16, the first £11,100 of gains will be exempt. The balance will be taxable. The tax rate will however depend on your other income. If you have any unused basic-rate band, you will be charged at 18 per cent on an amount equivalent to this. Any gains over this limit will be charged at 28 per cent.
"If you are married or in a civil partnership it would be worthwhile considering transferring the house into joint names some time before the sale. This would be done without incurring CGT and would allow the gain on the subsequent sale to be split between you, using both your and your spouse's annual exemptions and remaining basic-rate bands to the extent that these are available.
"If you wish to defer payment of the tax you could make investments in enterprise investment schemes (EISs). These investments give tax relief, and you can elect to defer gains from other sources against them, until such time as the EIS shares are disposed of. They are, however, a higher-risk investment and should not be used purely for tax reasons.
"Subject to the above, in the very worst case, if you are a higher-rate taxpayer and have already used your annual CGT exemption, your tax would be £100,800. If you sold in 2015-16 this would be payable on 31 January 2017."
George Osborne tries to dress up the extra tax on dividends by saying it is to deter owners of 'Close Companies' from saving tax by receiving dividends rather than a salary. That would be believable if the change only applied to Close Companies, but it does not. As drafted, it applies equally to all dividends received by those who choose to invest their savings in equities directly rather than enrich City intermediaries via individual savings accounts (Isas) and pensions.
Hardly what Mrs Thatcher had in mind when she encouraged the share-owning democracy, or maybe Mr Osborne thinks that idea is out of date?
Duncan Heenan, FCA (via email)
I am concerned at the effect the chancellor's changes to dividend taxation have on those with large portfolios - 'Large' being defined as more than [£5,000 (new tax-free allowance) ÷ 3.5% (average dividend yield)] = £142,857.
Not all such owners of 'large' share portfolios are actually rich. Take my elderly mother. She sold her house in late 2013 for £500,000 to pay to stay in a London care-home (£50,000 pa) You can work out for yourself how long that will last. Since interest rates are so dismal, she invested all the money in 10 blue-chip/investment trust shares, with an average dividend yield of 4 per cent.
My mother is certainly not one of those who has been commuting salary into dividends, supposedly the target of the chancellor's wrath. The correct strategy would have been to change the tax rules for dividends from companies not listed on recognised stock exchanges. However, I gather the chancellor is hoping to raise £2bn from this 'simplification', which doubtless explains his enthusiasm.
There must be long-term consequences from all this - some investors will doubtless avoid 'income' shares and go for 'growth' shares instead, distorting the market.
John White (via email)
John Hughman replies: You're both quite right that this will affect those who rely on investments to deliver a large amount of dividend income. However, the positive is that the vast majority of investors receive less than the new £5,000 dividend allowance each year and will pay less tax under the new regime - in that respect, we don't feel it's all that likely that the market will be distorted in favour of growth shares. And for those likely to be affected, we outlined a number of ways to mitigate any extra tax you may incur in last week's issue (http://bit.ly/1M3K9cs) - for higher-rate taxpayers the level of dividend income at which you'd pay more tax is £21,667.
