Planning for the CGT “Reform” - May 2010
The new government has announced plans to “reform” (i.e. increase) CGT. An emergency budget has been scheduled for June 22nd (when there will be a major distraction in South Africa).
The full details won’t be known until then, but this is likely:
1. Capital Gains Tax “Reform”
2. What Can YOU Do About It?
3. How does it work?
4. Timescale
5. Risks & Unwinding the Planning
1. Capital Gains Tax “Reform”
· CGT rates to be aligned with income tax. So higher-rate taxpayers will pay 40% or possibly even 50% on gains.
· “Generous exemptions” for gains on business assets. This could build on the current (very limited) entrepreneurs’ relief, or it could look more like the old business taper relief (or something completely new). And we don’t know whether CGT on business assets will go up from the current 18% flat rate (10% with entrepreneurs’ relief) - it is even possible (if unlikely) the effective rate could go down for business assets.
· The changes are likely to take effect in April 2011, but we cannot rule out an immediate change on the day of the budget, or “anti-forestalling” provisions, similar to those for the pension changes, to put limits on your ability to benefit from the current lower CGT rate in the run-up to next April.
Are you disposing of assets in the next 2 or 3 years? Will you pay CGT when you do?
We can implement tax planning to allow you to “bank” the current CGT rate now without being forced to actually pay the CGT unless you actually sell the asset. This planning is ideal if you are thinking of selling an asset at some point during 2010/11. Anyone who plans to sell in the next 2-3 years should also consider it. But there are some risks/costs (discussed below) so it will not be suitable for everyone, and we do not recommend it for anyone with no plan to sell during this period.
For non-business assets (investment land and shares in non-trading companies) we recommend looking at the planning straightaway, as it seems certain the CGT rate will go up on them.
For business assets (shares in trading companies and land used by your personal business - although be warned that it won’t be clear exactly what qualifies as a business asset until the budget) the planning can be implemented before the budget, to protect against the risk of an immediate change or of anti-forestalling provisions, or you could take this risk and wait until the budget before you decide what to do.
N.B. this is not relevant to gains on assets owned by companies - companies are subject to a separate tax regime on their gains, and no plans have yet been announced to change it.
In very broad terms, prior to the budget date, you agree to sell the relevant assets (shares, land etc) to an entity you own (the type of entity to use will depend on the specific circumstances). This triggers a CGT tax liability at the current rate on the value of that sale, but does not trigger the obligation to pay the tax. After the budget, the entity then either does the onward sale or is itself sold. Any uplift on the onward sale is subject to CGT at the rate applying in the future, and that transaction triggers the obligation to pay the current Although we consider there is a relatively low risk of HMRC successfully challenging whether the planning works, there are still associated costs and risks which we will explain to you.
CGT liability as well.
An advantage of the planning is that it should be possible to unwind it if it becomes clear that it is not going to be possible to complete an onward sale, without ever triggering the obligation to pay CGT (although of course no guarantee can be given on this).
You should consider the planning as soon as possible so that all the necessary paperwork can be prepared in good time.
5. Risks & Unwinding the Planning
Although we consider there is a relatively low risk of HMRC successfully challenging whether the planning works, there are still associated costs and risks which we will explain to you.
For more information on this subject please contact:
Bob Neal
Tel: 0845 634 1729
bob.neal@freethcartwright.co.uk
Whilst every effort has been made to ensure the accuracy of this bulletin, it does not provide complete coverage of the subjects referred to, and it is not a substitute for professional legal advice and should not be relied upon as such.
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