Act now to beat CGT rises

Tuesday, June 08, 2010 | Posted by: Sue Knight
Categories: Protecting your wealth | Tags: tax, entrepreneurs, tax planning, capital gains tax, CGT, Sue Knight, shares, assets, coalition agreement

How investors, entrepreneurs and owners of second properties can prepare for the coalition government’s forthcoming changes to capital gains tax (CGT).

Coalition agreement proposes CGT rises
In the Conservative Liberal Democrat coalition agreement, both parties have agreed to ‘seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities’.

While an increase in the current CGT rate of 18% is not unexpected, it is surprising that the agreement states that the rate is to be aligned with income tax rates (currently at a maximum of 50%), given that for some taxpayers this would increase the tax rate by up to 32%.

Who should be worried?
Those with share portfolios and second properties could face a tax rate of up to 50% on chargeable gains arising on this kind of non-business asset.

Details of the ‘generous exemptions’ that are to be afforded to entrepreneurial business activities are not yet available. However, the concern is that any exemption might apply in a similar way to Entrepreneurs’ Relief, with a lifetime limit.

To put some numbers on this: on a business gain of £10 million, if the new exemption reduces the CGT rate to nil but only applies to the first £2 million of lifetime gains, the net return to an individual could be as little as £6 million (£6.8 million if the CGT rate is only increased to 40%) as compared to £8.36 million, under the current regime. In addition, if there is a lifetime limit for the exemption, then to the extent that further chargeable gains are realised, these would be subject in full to capital gains tax at rates of up to 50%.

Of course, we could speculate all day as to the meaning of the text of the coalition agreement but taxpayers planning to sell assets in the short term (or within the next couple of years), may wish to take action to protect against a possible increase in their exposure to CGT.

Tax planning strategy to preserve current CGT rates
Are you thinking of selling shares in a trading company or other asset in the short term (or in the next couple of years)?

Then consider putting a strategy in place that will give you the option of realising currently inherent chargeable gains at current CGT rates, but without triggering a CGT liability until the final sale actually goes through.

This planning provides taxpayers with the comfort that, whatever happens in the emergency Budget on 22 June 2010, they have the opportunity to take advice now to ensure that they can benefit either from the current low CGT rates or possibly the proposed ‘generous exemptions’, if these prove to be more beneficial.

For further advice and guidance, visit our Tax Services.

The Emergency Budget will be announced at 3.30pm on 22 June. Bookmark this page to keep up to date with Grant Thornton’s analysis.

Also, register here for Grant Thornton’s live Emergency Budget webinar on 24 June, where you can hear from a panel of experts on what the Budget means for the UK economy, taxes and public sector.

Image: © ktylerconk

Read more posts on Protecting your wealth. 

Read more posts by Sue Knight.