May 2010

The new Coalition government plans to double capital gains tax (CGT) – possibly including Lib Dem proposals to cut the threshold from £10,100 to £1,000 – have thrown many investors’, landlords’ and employee share scheme members’ plans into disarray.

Investors with substantial portfolios of property and/or shares who have not protected them in tax shelters – such as trusts, individual savings accounts (ISAs) or pensions – face the daunting possibility that HM Revenue (HMRC) may grab half their gains.

This could destroy many people’s plans to use buy-to-let portfolios or shares accumulated over long periods of time to fund retirement.

When are the changes likely to take effect?

In law the Government could choose to impose the increase in CGT retrospectively to April 6 this year or even from May 11 when the Coalition proposals were announced.

However, this would be inequitable and unpopular so it is more likely that the proposed changes will take effect either from the date of the Emergency Budget, June 22, or from the start of the next tax year; April 6, 2011. There is a strong case to be made for this later date.

Having two rates of CGT in one tax year would be unusual and provides taxpayers little opportunity to arrange a disposal of certain assets such as property particularly when the housing market is still depressed and stock market conditions are volatile.  However, an immediate change cannot be ruled out.

If nobody knows “the rules”, what should I be doing?

The golden rule, as always, is don’t let the tax tail wag the commercial dog. If you were going to take a profit anyway, it’s probably best to do it before Budget Day.

Thus, if you no longer want your second home, now may be the time to sell it. The key day is the date of the exchange not completion, so you may have more chance than you think.

I have a second property which I am considering selling, what would be the tax implications?

Any gain made on the disposal of a property which is not your principal private residence will be subject to CGT.  If you were to sell the property now, the gain would be subject to CGT at the rate of 18 per cent but, if you sell the house once the proposals take effect, it seems likely that this rate will be closer to the higher rates of income tax.

Furnished holiday lettings currently benefit from more favourable business asset tax status although uncertainty remains as to whether or not this will continue to apply.

Will I benefit from the more generous relief for business assets?

We have no detail on the new rules – so nobody knows what type of asset will qualify for what the Coalition has described as “generous exemptions”. One would expect the favourable treatment to apply to shares in unquoted trading companies, sole traders and partnerships and assets used in such businesses. But will there be other conditions – for example, length or size of ownership?

At present, the first £2m of gains are taxed at 10 per cent where entrepreneur’s relief applies. Those holding assets which might qualify for the relief are perhaps in the worst position of all – it may be possible they could sell now, at 18 per cent, and find their tax rate would have been lower if they had delayed.

What else should I be doing?

Everybody needs to proceed with caution, and look at their own position.

(i)   It is probably a good idea to use your annual exemption now by selling investments just in case it is lowered.

(ii)  It might be prudent – but take investment advice first - to sell any shares standing at a gain. You cannot buy them back within 30 days, since the ‘bed and breakfast rules’ then apply – but you could ‘bed and spouse’ – that is, you sell to your spouse.

(iii) If you are considering disposing of an asset, consider splitting between husband and wife by a transfer before sale to maximise reliefs.

(iv) ISAs are an option where gains are free of CGT. The annual ISA allowance is now £10,200 per person per tax year and the opportunity to shelter gains by investing through ISAs has just become significantly more valuable.

(v)   Pensions are another major tax shelter. The amount that may be contributed to a self invested personal pension (SIPP) has been restricted and from next year higher rate tax relief will be gradually phased out for higher earners. This year, however, people who are to pay the new top rate of income tax at 50 per cent are able to benefit from full tax relief on their contributions.   So, for example, a contribution of £16,000 will be grossed up to £20,000 inside the SIPP and £6,000 can then reclaimed through the tax return. That means a top rate taxpayer’s net contribution of £10,000 is grossed up to £20,000 in the SIPP and CGT does not apply to capital gains arising in pensions.

What does the future look like?

Many assets will attract a larger tax bill on sale. So we may see investors moving more into CGT favoured assets – for example, we are likely to see stock market investors “wrapping” their investments – for example, in an offshore bond or a private trust, so they don’t pay CGT every time a stock is sold.  Venture Capital Trusts are potentially going to be more popular as well.