When to Sell your Investments

Newsletter issue - November 07.

Many entrepreneurs are unhappy about the proposed withdrawal of capital gains tax (CGT) taper relief and its replacement with a flat 18% rate of CGT from 6 April 2008, although there is now talk about a possible £100,000 exemption on retirement in certain circumstances. Taper relief can result in an effective 10% rate of CGT where business assets are sold after two years or more, and an effective 24% rate of CGT where non-business assets are sold after nine years or more. These rates are halved for basic rate taxpayers. So someone selling a business, or an asset that has been used in a business, could see their tax bill jump by 80% if the deal is delayed beyond 5 April 2008.

Conversely an investor, who is planning to sell non-business assets, such as an investment property or quoted shares, will see their tax rate reduce to 18% from perhaps 40% if the sale is made on or after 6 April 2008. However, the tax rate does not tell the full story as indexation allowance, which compensated for the effect of inflation between 1982 and 1998, is also being withdrawn for individuals from 6 April 2008.

Where an asset has been held for many years the indexation allowance can significantly reduce the gain before taper relief, and this applies to both business and non-business assets. However, the deductions due to indexation allowance and taper need to be balanced against the 18% tax rate on the resultant taxable gain payable from next year.

Where the original cost of the asset is quite low, indexation allowance will have only a marginal effect on the final gain. If you are planning to make a significant sale in the next six months ask us to do the calculations to see if you should wait until 6 April 2008 or not.