Capital Gains Tax Planning

10 January 2008

As you are probably aware, there will be new rules applicable to the disposal of assets chargeable to Capital Gains Tax (CGT) from 6 April next. Broadly, these aim to introduce a flat rate of CGT – 18% - and sweep away a host of reliefs the most notable of which is Taper Relief. 

 

The changes introduced in the Autumn statement have been the subject of considerable debate and there has been a great deal of pressure put on the Chancellor, Alistair Darling, to mitigate the effects of his proposals. However a promised statement by the Chancellor pre-Christmas has been deferred until sometime this year and cynics suggest that the Chancellor is playing a long game to keep taxpayers guessing as to what they can do before the new rules bite. The purpose of this atricle is to draw your attention to some of the CGT tax planning opportunities available but do bear in mind that there could still be surprises ahead as the proposals have yet to be finalised.

 

Taper Relief was introduced back in 1998 when it was suggested as a reward for long term investment irrespective of whether the asset in question was a business or non-business asset. For example, on the disposal of a fully qualifying business asset the effective rate of CGT is just 10% on any gain over and above the annual exemption (£9,200 currently). This is a significant saving on the standard CGT rate of 40%. Clearly there has been a change of heart by the Government and the idea of reward for long term investment has been removed under the proposed changes – allegedly in exchange for a simplification of the CGT regime.

 

For all capital gains made on or after 6 April next CGT will be charged at a flat rate of 18%. The availability of Taper Relief (and Indexation Relief) will be swept away even if you have held the assets for some considerable time. Put simply, the changes will mean that generally where you would have qualified for full Business Asset Taper Relief, the rate of tax that you will pay will rise from 10% to 18%. On the positive side, a disposal of non-business assets will now see a decrease in the rate from 40% (perhaps 24% if held for 10 years) to just 18%.

 

It follows that since the proposed rules only apply from 6 April next, asset disposals made before then should continue to be taxed under the existing regime. I say should because the announcement due from the Chancellor may yet introduce transitional provisions. Nonetheless as things stand you could either save tax by accelerating a disposal into the current tax year or by deferring it until after 6 April depending on the nature of the asset.

 

The question arises then as to whether disposals should be made now or later? In broad terms Chancery sees the opportunities as follows:

 

Where assets qualify for full Business Asset Taper Relief – it is almost certain to be advantageous for a disposal to be made prior to 6 April next.

 

For assets that do not attract Business Asset Taper Relief – it is almost certainly the case that it will be advantageous to delay a disposal until after 5 April next.

 

To ensure that any gains are charged in the appropriate tax year, it should be possible to organise a disposal that can benefit from the current rules. For example the use of Trusts or the exchange of unconditional contracts prior to 6 April should achieve this. 

 

On the other hand, it should be possible to use conditional contracts to delay existing or proposed transactions to beyond 5 April next to attract the 18% flat rate charge.

 

Where CGT losses exist it may well be best to utilise these during the current year at the full rate of tax rather than carrying them forward to be used at a lower rate of 18%.

 

In terms of a longer term tax strategy, it is worthwhile looking at converting items otherwise subject to Income Tax into capital transactions. For example, the nature of the investments that you make may be skewed towards capital gains rather than income gains.

 

Make use of all available tax shelters in any event!

 

Of course, good tax planning is all about thinking ahead and I would encourage you to consider how the proposed changes might impact on you and to get in touch with us to discuss any concerns that you may have.

If you would like to discuss the proposed CGT changes, please contact Mark Stemp or Delyth Barnett on 01908 699600