UK: Capital Gains Tax: What can be done Before Rates go up?

Last Updated: 18 May 2010
Article by Richard Croker, Mark Nichols and Nicholas Stretch

It now seems likely that the Conservative/Lib Dem coalition government led by David Cameron will introduce a number of Capital Gains Tax ("CGT") changes to apply to future sales by individuals and trusts. Please click here to read the Coalition Agreement.

The package of changes seems likely to include the replacement of the flat rate system with graduated rates comparable to income tax currently payable at rates from 20% - 50% (in line with the Lib Dem manifesto pledge). What is less clear is the scope and extent of reliefs and exceptions for business assets: rumours suggest that existing entrepreneurs' relief will be widened or a regime comparable to taper relief will be reintroduced. If so, there will need to be complex transitional rules.

The future of the annual exemption (currently £10,100) is unclear - a major reduction was proposed in the Lib Dem election manifesto.

We comment below on possible actions designed to minimise the impact of such changes.

Since the new government plans its first budget in late June/early July, the timescale for implementing tax planning could be short.

Overview of the current regime

  • A disposal occurs on the date of an unconditional agreement to sell (assuming that the agreement is completed in due course).
  • There is a single rate of CGT of 18% on all gains made from disposals on or after 6th April 2008.
  • Entrepreneurs' relief applies so that an effective 10% rate of CGT is available for the first £2 million of gains made on or after April 2008 on the disposal of qualifying holdings in trading companies, where the shareholder is an employee or officer of the company. Trust interests are also eligible to be included.

Possible future changes

Some will lose if rates go up:

  • Holders of non-business assets (eg individuals with buy-to-let or second homes and many investors in investment or listed companies) who may have a tax rate of up to 50%, whereas currently the flat rate is 18%, and
  • Holders of business assets who do not qualify for entrepreneurs' relief may also be liable to tax at graduated rates up to 50%.

However, there are also likely to be winners if the thresholds for entrepreneurs' relief are increased or amongst those who own business assets not currently eligible for entrepreneurs' relief if a form of business taper relief is reintroduced.

What can be done?

All those investors who stand to lose out from potential changes may be able to trigger a disposal prior to the introduction of changes, and save tax in the long run, by using one or more of the following methods. For these purposes we assume changes take effect from a future date – say 1st July 2010.

  • Where a sale is being negotiated or is in the offing. If the disposal happens before 1st July 2010, the tax rate will be 18%; if after, it will be potentially higher. Clearly, there will be pressure to "dispose" of the shares or other property - ie enter into an unconditional contract – before 1st July 2010. The most obvious buyer is the proposed purchaser, but if a sale cannot be finalised it might be that the property could be sold to a trust or other entity before 1st July 2010 with the trust etc. then selling to the ultimate purchaser. A suitable trust should be capable of being set up in a short timescale with a minimum of formality. The gain on the value of the property at the time it is given to the trust would be subject to tax at 18%. Only the balance should be subject to tax at any higher rate. Provided that the contract with the trustees is appropriately structured, tax only becomes payable as and when the sale to a third party purchaser occurs. Similar arrangements may also be possible with connected persons such as family members or companies.
  • There is no imminent sale. The assets could still be transferred into trust etc. using the above route. The tax only becomes payable as and when the sale to a third party purchaser occurs. However, before transfer, the impact on estate planning would need to be considered.
  • An imminent sale on a share for share or share for loan note basis. Normally, there is no disposal on an exchange of shares on this basis – a disposal is only recognised when the replacement shares or loan notes are sold. The rollover of gains is not automatic though. With a little structuring, the date of sale of the original shares can be made the date of the tax point and gains to date taxed at 18%, albeit at the expense of paying the relevant tax early and funding tax independently rather than out of sale proceeds. The advantage of this is that only future gains would be taxed at higher rates. While this would negate one key traditional tax benefit for a seller on a share for share/loan note exchange, which is deferral of tax on the whole gain until a later disposal, the overall benefit should be less tax in the long run.

Individual attitudes to risk, tax planning, cost, likely future investment returns, cashflow and the precise shape of any future regime (and estimates of when rates may start to come down) are all factors that would need to be considered, as well as the future of the capital gains annual exemption itself. Needless to say, specific circumstances would always have to be looked at. Not all taxpayers will prefer the "bird in the hand" and there clearly is a risk by taking quick action that a tax charge could be triggered on a disposal which could in the post-Budget regime be exempt due to falling within a widened business assets regime! However, we have considerable experience of planning for CGT rate changes and can guide you through all the pitfalls.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 14/05/2010.

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