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| Capital Gains Tax - Rule Changes 6/4/08 |
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Major changes have been announced, which come into effect soon. There has been a lot of uncertainty because, soon after announcing a radical change to the CGT rules, the Government then announced they would be changing the rules. Then followed a lengthy period before the introduction of Entrepreneurs Relief to appease business owners who were feeling hard done by.
We’ve considered the new rules and are of the opinion that few of our clients will be adversely affected. Those that are adversely affected may wish to take some kind of action before 5/4/08 so if you are one of those people, please contact us.
The circumstances where you could lose out are as follows (please note these changes apply to assets owned by individuals, not companies):
Business owners
The old rules allowed a business to be sold with a tax rate of only 10%. We’ve often taken advantage of this rule by advising businesses to accumulate profits in their companies, rather than taking the money out.
The new Entrepreneurs Relief achieves pretty much the same result for up to £1m worth of capital gains. So most small businesses won’t be worse off.
Businesses worth > £1m
(that’s £1m per owner so if you own a business jointly with your spouse, make that £2m.)
The excess over £1m would be taxed at 18% under the new rules rather than 10%.
What can you do about this? You could engineer a sale before 5/4/08, for example by dis-incorporating to an LLP, or by using a Trust, in order to take advantage of higher reliefs available now. However this brings forward the payment of tax, and you will end up paying tax on a “nothing” transaction. For this reason we feel it won’t be of real interest unless the owners have the intention of selling in the near future.
Employee Share schemes
If you have received shares from an approved share scheme you would qualify for Taper Relief and pay tax at only 10% (or less). Under the new rules you get no special reliefs and will pay tax at 18%. If you own such shares you may consider selling them before 5/4/08. Don’t forget you may also benefit by transferring some to your spouse beforehand. You can always buy them back later – but make sure you leave at least a month.
Residential Buy to Let Properties
(a) For a higher rate taxpayer the reduction of the tax rate to 18% more than compensates for the loss of a maximum 40% taper relief.
(b) For a basic rate taxpayer you will lose the taper relief with only a small 2% reduction in your tax rate. So if you have owned a property for a long time it is likely you’ll be worse off after 5/4/08. You could mitigate this by selling your property to a company, for example.
(c) If you have owned a property for a long time you may have built up some ‘indexation allowance’ which will also be lost. Again if you are in this situation it may be worth contacting us.
Commercial properties – potentially big losers
In the past you probably benefitted from full business taper relief and therefore paid tax at 10% on any Gains. This will be lost and your tax rate will increase to 18% except in one circumstance – if you sell a privately owned business property at the same time as selling your business.
There are, of course, other implications, like Inheritance Tax considerations – but if you own commercial property with a large Gain likely, please contact us quickly to discuss the options.
Capital Gains Tax deferral
It has been brought to my attention that there is an EIS scheme on the market which seeks to provide benefits to individuals with Capital Gains to shelter. For any Gains after July 05, proceeds can be invested in this EIS to defer the Capital Gain. The EIS will run for approx 3.5 years and will then cease – at that time your Capital Gain becomes taxable, but the rate will only be 18%. In addition you get 20% Income Tax relief on your subscription.
This is a financial product and you should take financial advice before considering this investment. Please contact me if interested, and I can provide further details. It will mostly benefit individuals where they have paid 40% tax on their Gains, rather than benefitting from Taper Relief.
Should you wish to discuss any of the above please do not hesitate to ring us on 01604 678470 .
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