Big changes to capital gains tax on 6 April 2008
will benefit some people, but leave others worse off. What
is certain is that nobody who owns a business or investments
will be unaffected. You still have some
time to check what impact the changes will have on
you
and plan for them. But don’t leave it to the last
moment as some arrangements take time
to set up. Remember too that 6 April is a Sunday, so in practice
you might only have until Friday 4 April to
finalise matters.
What will change?
The main proposals are:
- Capital gains tax (CGT) will be charged at a uniform 18%
instead of at 10%, 20% and 40%,
depending on the amount of your income and gains in the
tax year.
- Indexation relief, which adjusted for inflation between
1982 and 1998, will disappear.
- Taper relief will end. Taper relief reduces tax according
to how long a person has owned an asset
and is especially favourable for business assets.
- A new entrepreneurs’ relief will reduce the effective
CGT rate to 10% on gains of up to £1 million
on sales of businesses and some associated sales.
- The rules for non-domiciled UK residents are being
tightened up.
What can you do?
There is plenty you can do to make sure you are among the
winners from the changes.
Timing a sale
Many investors will pay less tax if
they wait until after 5 April to sell an asset such as property
or quoted shares. At present, with non-business
taper relief, a higher rate taxpayer pays CGT at rates
ranging from 24% to 40%, depending on how long you have
owned the
asset. Delaying a sale will mean your
gain is taxed at 18%.
Remember that it is the contract date that determines in
which tax year a sale falls for CGT, not the
completion date, if different. If your gain would
be taxed at the basic rate, you are likely to pay tax at
a lower rate this year than next year
on a sale of a non-business asset you have owned for five
or more years. Timing may be less important
for people selling a business or shares in most types of
family company. The tax you would pay
on a sale this year is 10% of your gain on assets you have
owned at least two years, the same as after
6 April 2008 with entrepreneurs’ relief.
But entrepreneurs’ relief is much more limited
in scope than business taper relief:
- You need to sell the whole or part
of a business that you carried on as a sole trader or partner,
not just assets of the business, unless the business has
ended.
- For sales of shares to qualify, you have to be an employee
or director and own at least 5% of the
company.
- Gains in excess of £1 million will be taxed at
the full 18%.
- There are other conditions, and the proposals could
change before 6 April 2008, so if you are
selling a business you should take professional advice.
If you are selling business assets that will not qualify
for entrepreneurs’ relief, or an existing relief such as rollover relief, you are likely to pay less tax if
you sell before 6 April 2008.
Indexation
Indexation complicates the decision
on timing. Indexation particularly benefits landowners and anyone
else who has owned assets with a high base cost for a long
time. In effect, it more than doubles
the cost of assets acquired in April 1982 or earlier and
uplifts the cost of any asset bought up to March 1998.
If you do not want to sell an asset
before 6 April 2008, you may be able to preserve the indexation allowance by transferring it to your spouse or civil partner
before 6 April 2008.
- The transfer does not result in any tax, but your
spouse or partner acquires it at a ‘cost’ that
includes the indexation allowance. This acquired indexation
will not be lost.
- The transfer must be genuine with no strings attached
and preferably documented.
- HMRC has expressed approval of this strategy.
Employee shares
Shares acquired through an employer’s
scheme are unlikely to qualify for entrepreneurs’ relief
as an employee will rarely own 5% of the
company. You might want to sell such shares before 6 April
if you have owned them for two years or more (or for at least
one year if you are a basic rate taxpayer) as you are likely to pay a higher rate of CGT under the new
rules.
If you have enterprise management incentive
(EMI) share options, business taper relief runs from the date
you were granted the option, rather than the date you exercise
it. You can benefit from taper relief by exercising your options and selling your shares
before 6 April 2008.
Loan notes
Perhaps you have already sold a business
and received loan notes or shares in the purchasing company.
You need to decide whether to redeem the loan notes or sell
the shares before 6 April 2008 to benefit from a lower CGT rate.
Taking loan notes or shares as consideration
for selling a business defers CGT until the loan notes are encashed
or the shares sold. If that happens after 5 April 2008, you
will pay tax on the full gain without
taper relief. Loan notes and most shares received in these
circumstances will not meet the conditions for entrepreneurs’ relief.
If you redeem your loan notes or sell
your shares before 6 April, your deferred gain will qualify
for taper relief. But you must take professional
advice as loan notes and share exchanges vary in their tax consequences, and there are some anti-avoidance rules.
If you are currently selling a business
and receiving some of the consideration as loan notes, you might
benefit from electing not to defer your CGT. Again you need
to take advice on the consequences.
Sale or gift to a trust
If you do not want to sell business
assets now, you could still benefit from taper relief by
transferring them to a trust for your
own benefit. This is taxed as a sale at market value, so
if you make the transfer before 6 April
you would get taper relief. The drawback is that you have
to pay the tax on 31 January 2009, so it is usually only worth doing if you expect to
sell the assets fairly soon after 6 April.
If a trust pays anything for the asset, there may be stamp
duty.
Non-domiciliaries
If you are not domiciled in the UK,
you are taxed only on gains you remit to, or bring into,
the UK. You may benefit from remitting
gains to the UK in the current tax year or from delaying
remittances. The remittance basis rules
are complex and changing on 6 April. The decision will depend
on your own circumstances and you should take advice.
Until now, non-domiciliaries have been
able to avoid CGT by owning UK assets in an offshore trust
or company. From 6 April 2008, you will
be charged tax on sales by your offshore trust or company,
so selling before that date might be advisable. Trust gains
made before 6 April 2008 will not be taxed.
Other considerations
Tax should not be the only factor in
your decisions. You must always consider the commercial consequences
as well. For example, bringing forward a sale may be pointless
if it means you have to accept a much lower price.
Remember also that the proposed changes
are just that – proposals.
The details might change. Even the Budget on 12 March might not be the final word. |
