Many investors have welcomed the proposed
replacement of capital gains tax taper relief by a flat tax
rate of 18% from 6 April 2008. Taper
relief, now given only on disposals
up to 5 April 2008, reduces tax according to how long
you have owned the asset. But even with the
maximum taper relief for non-business assets – on
property and other investments owned since before 17 March 1998 –
a higher rate taxpayer
currently still pays tax at
24%.
However, the change would leave many basic
rate taxpayers worse off. As long as you have owned investments
for at least fi ve years, your effective
tax rate after taper relief is currently
less than 18%. You might want to sell such investments before
6 April 2008, especially assets you have held
since before 17 March 1998, on which your
tax rate after taper relief is currently only 12%.
Another group that would lose out from
the changes in April 2008 are people who acquired
valuable investments a long time ago.
This is because indexation allowance is
also due to be abolished. Indexation allowance
increased the cost of an asset by reference
to inflation from 1982 until 1998, when
it was replaced by taper relief. The indexation
allowance accumulated up to 1998 was frozen
and more than doubles the cost of assets acquired in
April 1982 or earlier.
For example, if you sell a property that
you bought in 1981 for £30,000,
you can deduct the cost plus £31,410
in calculating your capital gain. Even
this frozen indexation allowance is set
to be abolished for disposals
from 6 April 2008 – another
reason to think about selling
assets before then.
If you are married or in a civil partnership,
you might be able to preserve the frozen
indexation allowance by
transferring assets from one partner to the other.
You would not have to pay any tax on the transfer but your
partner would
acquire the asset at a ‘cost’ that includes the
indexation allowance. This ‘acquired’ indexation
would not be lost. There is some uncertainty
about whether this strategy will work for assets originally
acquired before
1 April 1982, but we expect this to be
resolved soon.
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