In advance of the emergency Budget on 22 June 2010, Louise Somerset, Tax Director from RBC Wealth Management, provides advice around how individuals can prepare for the proposed CGT rise. Please find her comments below.
In advance of the emergency Budget on 22 June 2010, Louise Somerset, Tax Director from RBC Wealth Management, provides advice around how individuals can prepare for the proposed CGT rise. Please find her comments below.
Context
“The first Budget of the new Government will be on June 22, 2010. That means that there is a period of about 4 weeks before the start of what will be a very different tax environment.
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“Although we will only see the full extent of the Chancellor’s plans in the Budget, some of the outlines are becoming clear already. The existence of a coalition has forced both parties to give up some of their tax plans while accepting some from the other. One effect of this is the disappearance of the Liberal Democrats’ “mansion tax”, whilst another is the indefinite deferral of Conservative plans for reforming inheritance tax. Liberal Democrat plans to limit claims for non-domiciled status to a maximum of 7 years also appear to have been withdrawn.
“Most of the changes to the personal tax system are likely to take effect from next April, but there is one area where we know that change is coming. The new Government intends to increase capital gains tax rates to bring them more into line with income tax. For many people this means that the tax due on the sale or gift of assets may more than double. It is possible that the new rate will take effect immediately.”
Individuals should consider a number of issues with regard to the CGT increase
1. There is no guarantee that the relief for the sale of business assets will be as generous after the Budget as it is currently. People should consider crystallising capital gains on business assets before the Budget in order to guarantee a 10% effective tax rate on the first £2m of gains they make, for example by selling shares to a family trust.
2. Similar planning can be used for property. Consider locking in the 18% CGT rate for buy to let properties by selling them to a family member or trust before the Budget, because it is very likely that tax rates on investment properties will be much higher later on.
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3. If you have other investments standing at a gain, consider selling them now in order to pay tax at 18%. For quoted shares, it is worth considering “bed and breakfasting” shares by selling them now and buying them back after 30 days, if you want to benefit from the 18% tax rate but don’t want to sell the investment.
4. If you have assets standing at a loss it may be a good idea to delay selling them until after the Budget, to make sure that they can be set against capital gains taxable at the new, higher, rates. If you are considering making disposals you should talk to a tax advisor to make sure that you do not lose out on tax relief through poor timing.
5. If you have a trust with “stockpiled” capital gains, you should contact your tax advisor. Now may be a good time to take a distribution from a trust in order to make sure that you only pay tax at a maximum rate of 28.8%: previous tax rates of up to 64% applied until 2008, and these or similar charges could make a comeback in the Budget.
“All of these ideas have downsides as well as advantages. It’s great to lock in an 18% tax rate, but doing so by selling an asset can mean creating a tax charge where none existed before. You should always take professional advice in these circumstances, to make sure that you understand all of the implications. Above all, it’s never a good idea to let the tax tail wag the commercial dog!”
To speak to Louise, please contact:
Clare Morgan
Greentarget
The Old Pump House
19 Hooper Street
London E1 8BU
T 020 7680 5130
F 020 7702 0779
